NYSE Margin Debt Dips In July: Risk Rank At No. 30

Includes: DIA, NY, NYC, QQQ, SPY
by: J.J. McGrath


New York Stock Exchange margin debt declined to about $460.23 billion in July from about $464.31 billion in June, the exchange reported this week.

NYSE margin debt at its latest level is therefore just -$5.49 billion, or -1.18 percent, lower than its all-time high of around $465.72 billion in February.

The risk of speculation appeared lower in July than it did in June, but higher than in 78.26 percent of all months evaluated by my proprietary methodology.

Margin debt at the New York Stock Exchange and the share price of the SPDR S&P 500 ETF (NYSEARCA:SPY) both declined in July, moving in the same direction for the third straight month. These movements make sense in a historical context because there has been a strong positive correlation between NYSE margin debt and SPY since 1993.

NYSE margin debt dipped to about $460.23 billion in July from about $464.31 billion in June, a drop of -$4.08 billion, or -0.88 percent, while SPY fell to $193.09 from a record $195.72, a loss of -$2.63, or -1.34 percent. Many equity-market participants consider NYSE margin debt a gauge of speculation in the stock market.

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.

My analyses of the relevant NYSE data series center 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."

Figure 1: MDDI, August 2013-July 2014

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Source: This chart is based on a proprietary analysis of monthly margin-debt data at NYSE's online site.

The MDDI is basically 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 July value is 170, which is lower than its June value of 171 and six-month SMA of 170.17, so I consider the market to have switched modes, to bearish from bullish, as of July 31. This switch appears attributable to the dissipating effect of 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 that I mentioned in my NYSE margin-debt article last month.

Figure 2: Highest- And Lowest-Risk Months, Per SMC Risk Rank

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Source: This table is based on proprietary analyses of monthly securities-market-credit data at NYSE's online site.

July is No. 30 among all 138 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. June 2014 is No. 1, December 2013 is No. 2 and February 2014 is No. 3 among all months ranked (Figure 2). July's SMC Risk Rank of No. 30 means I consider the stock-market risk associated with speculation last month was higher than 78.26 percent and lower than 21.01 percent of 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.

Figure 3: NYSE Margin Debt And SPY, February 1993-July 2014

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Source: This chart is based on monthly margin-debt data at NYSE's online site and adjusted monthly SPY data at Yahoo Finance.

My assessment of the deluge of Fedspeak delivered last week indicates the U.S. Federal Reserve remains on track to announce the end of its current quantitative-easing program as soon as October of this year and the beginning of its interest-rate hikes as soon as April of next year.

Accordingly, I believe the inflection points for both NYSE margin debt and SPY are drawing nigh because in the financial markets, it's money that matters.

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: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.