- Margin debt at the New York Stock Exchange rose to an all-time high of about $451.30 billion in January from its previous record high of about $444.93 billion in December.
- The increase in NYSE margin debt came even as the SPDR S&P 500 ETF's (NYSEARCA:SPY) monthly closing value fell to $178.18 from $184.69 during the same period.
- One proprietary tool, the Margin Debt Directional Indicator, suggests the equity market continued to be in bullish mode as of Jan. 31, despite the dip in SPY.
- Another proprietary tool, the Securities Market Credit Risk Rank, finds January is No. 10 and December is No. 1 among all 132 months evaluated by the methodology.
Margin debt at the New York Stock Exchange rose to an all-time high of about $451.30 billion in January from about $444.93 billion in December, even as the SPDR S&P 500 ETF's (SPY) monthly closing value fell to $178.18 from its record high of $184.69 on the same basis. NYSE has reported monthly data on securities market credit in three discrete series (Margin Debt, Free Credit Cash Accounts and Credit Balances in Margin Accounts) since 2003 and on margin debt itself since 1959.
NYSE margin debt is the aggregated dollar value of issues bought on margin (i.e., borrowed money) across the exchange. Many equity-market participants consider it a gauge of speculation in the stock market. The U.S. Federal Reserve's Regulation T currently has the initial margin requirement set at 50 percent.
Despite the directional divergence between NYSE margin debt and SPY in January, there is a strong positive correlation between them, so it is unsurprising the excellent coincident or leading indicators of long-term movements in the exchange-traded fund based on the S&P 500 have been built employing NYSE data on securities market credit in general and margin debt in particular.
My own analyses of the relevant NYSE data series historically have focused on generating the most recent values of two main metrics on a monthly basis, the Margin Debt Directional Indicator, or MDDI, and the Securities Market Credit Risk Rank, or SMC Risk Rank, as discussed first in "NYSE Margin Debt As An Indicator Of Long-Term Movements In S&P 500" and then in "NYSE Margin Debt Hits Record $444.93 Billion In December: Risk Rank At No. 1."
Figure 1: MDDI, February 2013-January 2014
Source: This table is based on a proprietary analysis of monthly margin-debt data at NYSE's online site.
The MDDI centers on a comparative assessment of NYSE margin debt in the two most recent months of the data series that began in January 1959. This indicator is pretty simple-minded even by my standards, but it is amazingly helpful in identifying major trends in the equity market.
If the most recent value of the MDDI (MDDI in Figure 1) is higher than its six-month simple moving average (MDDI 6M SMA in the same figure), then I believe the stock market is in bullish mode. If the most recent value of the MDDI is lower than its six-month SMA, then I think the stock market is in bearish mode.
The most recent value of the MDDI is 170, which is higher than its six-month SMA of 167.17, so I consider the market to have been in bullish mode as of Jan. 31.
Figure 2: Highest- And Lowest-Risk Months, Per SMC Risk Rank
Source: This table is based on proprietary analyses of monthly securities-market-credit data at NYSE's online site.
January 2014 is No. 10 and December 2013 is No. 1 among all 132 months evaluated since the January 2003 baseline by my SMC Risk Rank methodology, which carries out a comparative assessment of the data NYSE has reported in three discrete series: Margin Debt, Free Credit Cash Accounts and Credit Balances in Margin Accounts.
This dynamic indicator is designed as a measure of equity-market risk associated with speculation, ranking each month in the data set on an ongoing basis. A high SMC Risk Rank for a given month suggests the stock market may be close to a significant peak, and a low SMC Risk Rank for a given month suggests the stock market may be close to a significant trough. In my interpretation, the term close in this context typically has meant within three to six months. Obviously, a cluster of high or low levels is more meaningful than a single high or low reading.
The difference between the SMC Risk Ranks for December and January indicates the risk posed by speculation in the equity market may have dipped on a relative basis during the period, but it still appeared high on an absolute basis historically (i.e., it suggests this risk was higher last month than in 92.42 percent of all months in the data set).
As mentioned previously, there is a strong positive correlation between NYSE margin debt and SPY, whose coefficient I calculate as 0.94 from May 2000 to January 2014. As unmentioned previously, there are also strong positive correlations between NYSE margin debt and the SPDR S&P MidCap 400 ETF (NYSEARCA:MDY), 0.92 during the same period, as well as between it and the iShares Core S&P Small-Cap ETF (NYSEARCA:IJR), 0.91 over the same period. Below are three charts illustrating each of these relationships.
Figure 3: NYSE Margin Debt And SPY, May 2000-January 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and monthly SPY data at Yahoo Finance.
Figure 4: NYSE Margin Debt And MDY, May 2000-January 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and monthly MDY data at Yahoo Finance.
Figure 5: NYSE Margin Debt And IJR, May 2000-January 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and monthly IJR data at Yahoo Finance.
Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.