Margin debt at the New York Stock Exchange and the share price of the SPDR S&P 500 ETF (NYSEARCA:SPY) both advanced in June, moving in the same direction for the second consecutive month. The former ballooned to $464.31 billion from $438.55 billion, a burgeoning of $25.76 billion, or 5.87 percent, and the latter grew to a record $195.72 from $191.76, an increase of $3.96, or 2.07 percent.
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.
There has been a strong positive correlation between NYSE margin debt and SPY historically. Therefore, it is unsurprising NYSE data on securities market credit in general and margin debt in particular have been employed to construct excellent coincident or leading indicators of long-term movements in the exchange-traded fund based on the S&P 500.
My analyses of the relevant NYSE data series in recent years have centered on two proprietary metrics, 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." I look at them in the given order in an attempt to avoid making egregious errors in the stock market.
Figure 1: MDDI, July 2013-June 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. 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 equity 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 MDDI's June value is 170, which is higher than its May value of 170 and six-month SMA of 170.17, so I consider the market to have been in bullish mode as of June 30.
I cannot prove it based on NYSE data on securities market credit, but I believe the explosion in margin debt last month may have been related to the European Central Bank's decision to move its deposit interest rate to -0.10 percent from 0.00 percent on certain funds banks have parked at the central bank.
The ECB's move to a negative interest rate from a basically neutral interest rate is functionally a tax, one some banks are able to avoid by increasing their lending to other banks. Because this move was announced June 5 and became effective June 11, I suspect it likely was the single biggest factor in the recent swelling of NYSE market debt. And I think its effects already have manifested themselves, which means I would be completely unsurprised should margin debt not expand but contract in July.
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.
June is No. 1 among all 137 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.
The dynamic SMC Risk Rank is designed as a measure of equity-market risk associated with speculation, ranking each month in the data set on an ongoing basis. Due to the explosion in NYSE margin debt last month, December 2013 is now No. 2 and February 2014 is now No. 3 among all months ranked (Figure 2).
June's SMC Risk Rank of No. 1 means I consider the stock-market risk associated with speculation was higher last month than in all other months evaluated by the methodology.
A high SMC Risk Rank for a given month suggests the equity 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.
However, I suspect the inflection point in the market between its present long-term upward movement and its future long-term downward movement could come sooner rather than later (i.e., either around or by the end of the third quarter), based on the U.S. Federal Reserve's bias toward tightening and away from loosening its monetary policies.
Figure 3: NYSE Margin Debt And SPY, February 1993-June 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and adjusted monthly SPY data at Yahoo Finance.
I believe massive quantitative easing by the Fed since September 2012 has been the key factor for both NYSE margin debt and SPY in their moves to nosebleed levels, and I think massive QE by the ECB would be about the only factor able to keep them there. As a result, I will have an eye, or two, peeled for its next decision Aug. 7.
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