Margin debt at the New York Stock Exchange hit an all-time high of about $465.72 billion in February, as it reached a nominal record level for the sixth month in a row. The increase in NYSE margin debt came as the SPDR S&P 500 ETF's (NYSEARCA:SPY) adjusted monthly closing value also hit an all-time high of $185.47 during the same period.
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 currently has the initial margin requirement set at 50 percent.
There is a strong positive correlation between NYSE margin debt and SPY, so it is unsurprising 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 described in "NYSE Margin Debt As An Indicator Of Long-Term Movements In S&P 500."
Figure 1: MDDI, March 2013-February 2014
Source: This chart 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 helpful in identifying major trends in the equity market.
If the latest 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 latest 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 171, which is higher than its six-month SMA of 168.50, so I consider the market to have been in bullish mode as of Feb. 28.
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.
December 2013 is No. 1 and February 2014 is No. 2 among all 133 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 is a single high or low reading.
The difference between the SMC Risk Ranks for January (No. 10) and February (No. 2) indicates the risk posed by speculation in the equity market may have risen during the period, as it suggests this risk was higher last month than it was in 98.50 percent of all months in the data set.
Figure 3: NYSE Margin Debt And SPY, February 1993-February 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and adjusted monthly SPY data at Yahoo Finance.
As mentioned previously, there is a strong positive correlation between NYSE margin debt and SPY, whose coefficient I calculate as 0.96 from February 1993 to February 2014 and whose relationship is graphically depicted in Figure 3.
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.