Is the Risk Monster Getting Hungry Again?

Back in November, I wrote on the subject of the NYSE Margin Debt levels. The raw data can be found here.

There are many sentiment indicators I like to follow. I consider the NYSE Margin Debt levels to be yet another useful sentiment indicator. The peaks and troughs in the NYSE Margin Debt levels tend to coincide with the peaks and troughs in the major indexes.

So now that many pundits are calling the March lows "the" bottom, I thought it would be useful to revisit the NYSE Margin Debt level. While objects in rear-view mirrors are larger than they appear (or is that closer than they appear?), it appears that margin debt reached a cyclical nadir at $322.78M in December 2007. This trough comes after a cyclical peak of $381.37M in July 2007. The last peak to trough move was from March 2000 when margin debt was $278.53M to September 2002 when margin debt bottomed out at $130.21M.

While the timing of the peaks and troughs in the NYSE Margin Debt tends to coincide with the peaks and troughs in the major index price levels, it seems that the magnitude of the drawdowns also tends to mirror the peak to trough drawdowns in the index price levels. The March 2000 peak to the September 2002 trough in margin debt was 53%. Sound familiar? If so here's why; the peak to trough drawdown during the same period in the S&P 500 was 49%. Just a coincidence? Maybe. But then the July 2007 peak to the December 2007 trough in margin debt was 15% while the July 2007 peak to the March 2008 trough in the S&P 500 was 18%. Yeah, just a coincidence.

I think it's safe to say that risk appetite is returning to the markets. But if we go by the level of NYSE Margin Debt it's too early to call the March lows "the" bottom. A careful study of the NYSE Margin Debt levels shows some false bottoms in March 2001 and October 2001 before "the" bottom was made in September 2002. If you believe in the predictive power of NYSE Margin Debt then make hay while the sun shines. Just be sure to keep an eye on the horizon for more storm clouds.

Comments

[User 172055]

All those debt numbers should be billions not millions. $322.78M of NYSE margin debt didn't sound like much. I followed your data link and it's actually $322,780M. Though it doesn't change the point of the article.

[Paul D.Castro, CFA]

Thanks for pointing out the needed correction which I made to my blog.