J.J. McGrath

Long/short equity, healthcare, oil & gas, tech
J.J. McGrath
Long/short equity, healthcare, oil & gas, tech
Contributor since: 2011
Howdy, mjtroll1!
— the mdy/spy pair recently touched multiyear lows (mdy cheap)..pair shows good mean reversion tendency —
Based on my interpretation of the SPY:MDY ratio’s five-year weekly chart today, I see the recently reached reading of 0.8009 as the highest recorded during the entire period, which in context I consider supportive of your thesis.
Based on my parsing of a boatload of other data, however, I see neither SPY nor MDY as likely to behave well in the foreseeable future. If I were to go long MDY and go short SPY Monday morning, I would anticipate being underwater on this paired trade for quite a while — unless, of course, the U.S. Federal Open Market Committee were to announce reversals in its present policies on interest rates and quantitative easing.
Good luck!
J.J.
Howdy, Hardog!

— qqq is tough to beat. The good thing is you never have to worry about it going to 0 —
The one good thing I always do is avoid the use of words like “Never.”
(Heh heh heh.)
Good luck!
J.J.
Howdy, Hardog!
— Both are interesting core ETFs. —
Indeed. And I almost recall a time when they were nearly the only ETFs in the small-cap space with sufficient market liquidity to interest me. (Of course, there are other small-cap funds with acceptable liquidity nowadays.)
Good luck!
J.J.
Howdy, Hardog!

— I like all the ETF Indices named . Best in my mind is QQQ. —
Funny you should mention that one: I submitted a piece about it to our droogies at Seeking Alpha this very day.
Good luck!
J.J.
Howdy, Mr.Sceptic!
— Great article. —
Thanks for the kind words!
— I call it calm and prudent caution. Everyone needs a good dose of it from time to time. —
I believe so. If Lord Chamberlain Polonius didn’t counsel, “Neither a permabear nor a permabull be,” then he should have.
Good luck!
J.J.
Howdy, munkeyrattdawg!

— So what Dude. What's your point. —
Well, I believe I made a number of points in the article. However, the one most important to me as a financial-market participant centers on the fact the U.S. equity-market risk posed by speculation as reflected by NYSE securities-market-credit data in recent months is as high as or higher than at any other time since January 2003. Some people take this risk seriously; other people do not take this risk seriously: I count myself among the former.
Good luck!
J.J.
Howdy, Hardog!

— Tks for that —
My pleasure.
— Of course MDY is one of the few ETFs I don't own, figures. —
Given MDY’s negative returns in June (when it lost -1.28 percent) and in the second quarter (when it lost -1.12 percent), I suspect the ETF’s absence in your portfolio recently has been quite OK.
Good luck!
J.J.
Howdy, AMcCausland!
— Good well written article--thanks. —
And thanks for the kind words!
— It would be interesting to see the SPY Monthly Change, 2015 Vs. 2007-2009 Mean given a lot of the recent chatter on SA about the fear of 2007-2010 reoccurring. —
I agree. And I do have something surrounding your point in the works, but I do not anticipate publishing anything about it in the next few weeks.
— I tend to hedge my portfolio and build cash from around the third week of April through the end of June, and then from late June/August through around the third week of October. (I follow a system similar to the late Sy Harding's "Seasonal Timing System"--using technical indicators to get out or hedge in late April and get fully invested in late October/early November.) —
Historically, entries through the October/November window and exits through the May/June window indeed have displayed a tendency to position people in good places in SPYWorld, as indicated by the above Figures 4 and 5 (and their underlying data series). Of course, there are some big honkin’ exceptions, such as October/November 2007, which was not really a great time to buy, and May/June 2009, which was not really a great time to sell.
Good luck!
J.J.
Howdy, Hardog!
— Lovely article —
Thanks for the kind words!
— I follow all these ETFs. As a senior starting to transition into these from my stable of DGI stocks now. Keeping it simple. —
Simplicity is a beautiful thing. Usually.
Good luck!
J.J.
Howdy, xr1000!

— Well written and graphically presented topic. —
Thanks for the kind words!
— I guess the only constant in life is change.... —
Amen. And I hope we can bob like corks above this sea of change, regardless of where its currents, tides and waves may lead us.
Good luck!
J.J.
Howdy, brainleft!

— I read; us $ up= invest somewhere other than u.s. England, Germany, India. .etc. However spy is full of international companies so why not just purchase spy on dips? —
As a growth-and-value guy, I personally am uninterested in buying SPY at present because I see it — and the underlying S&P 500 — as offering neither growth nor value, which is especially important to me at a time when the U.S. Federal Reserve is not making asset purchases under a quantitative-easing program.
Meanwhile, you and I may interpret the currency-exchange situation’s effect on the ETF in different ways.
I suspect we might agree SPY’s constituent companies have plenty of exposure to both domestic and foreign markets, with good reason. Bearing in mind almost one-half of the S&P 500 index firms did not furnish enough of the information necessary to paint a complete picture of their global sales in 2012, the rest of them indicated they booked 53.4 percent of their sales inside the U.S. and 46.6 percent of their sales outside the U.S., according to S&P Dow Jones Indices’ “S&P 500 2013: Global Sales Year in Review” (http://bit.ly/1eqjEQV).
However, I also suspect we might disagree about the currency-exchange situation’s impact on SPY’s constituent companies in terms of their revenue, earnings and margins. This impact is associated with a stronger U.S. dollar on the one side and a weaker euro, Japanese yen, British pound sterling, Canadian dollar, Swedish krona and Swiss franc on the other side. I argue this disparity has made American products and services offered in foreign markets comparatively more expensive in July 2015 than they were in July 2014, putting them at a competitive disadvantage relative to non-American products and services. With respect to SPY, this means I would be more interested in selling the rips than buying the dips, which, of course, is easier said than done, given the rips have been few and far between since the Fed concluded its asset purchases under QE3+ last October.
Good luck!
J.J.
Howdy, rz2013!

— Speculators may have been borrowing and buying other assets , rather then stocks - that would be the stack of stock behind the Margin is even smaller then it appears —
Whatever the choices of investments made by those currently on margin, I would agree that when the next big round of margin calls gets under way the market value of the stack of stock securing the loans is likely to be a lot smaller than it is today.
Good luck!
J.J.
Howdy, Jeffstock79!

— Correlation between margin debt and stock market is meaningless. —
It may be meaningless to you, but it might be meaningful to me. And here’s why:
• In connection with the first massive equity-market bubble associated with the 21st century, the level of NYSE margin debt peaked at about $278.53 billion in March 2000 and the adjusted closing monthly share price of SPY topped at $115.06 in August 2000 (although the ETF hit its intraday high of $155.75 March 24, when its adjusted closing daily share price was $116.27). Therefore, margin debt could be interpreted as either a coincident indicator or a leading indicator in this case.
• In connection with the second massive stock-market bubble associated with the 21st century, the level of NYSE margin debt peaked at about $381.37 billion in July 2007 and the adjusted closing monthly share price of SPY topped at $131.42 in October 2007 (as the ETF hit its intraday high of $157.52 Oct. 11, when its adjusted closing daily share price was $132.76). Therefore, margin debt was a leading indicator in this case.
• In connection with the third massive market bubble associated with the 21st century, my measurement of the aggregated behavioral divergence between NYSE margin debt (up a lot) and SPY (up a little) in recently reported months in conjunction with other data has led me to at least consider the possibility that margin debt eventually may be parsed as either a coincident indicator or a lagging indicator in this case, depending on the movements of the two variables in future months.
Good luck!
J.J.
— I have to admit that I am having a hoot watching the margin and whackiness in China. Heh. 10 % swings over 2 days - up and down. Have popcorn and drink ready when that thing comes totally unwound. —
Being a growth-and-value guy, I do not habitually trade volatility, but there are certain places at certain times the practice appears attractive even to the likes of me: China in 2015, the U.S. in 2011 and almost everywhere between late 2007 and early 2009. Whoosh. Whoosh. Whoosh.
— I was not inferring that "I" was having the discussion. Those receiving margin calls. I have a Cash account - no margin for me. —
Gotcha. No margin for me, either.

— I am still of the opinion that the increasing margin debt ain't doing much of anything. —
I agree, with respect to the domestic equity market (as opposed to foreign stock markets).
— When margin debt goes down, stocks will have already started going down. —
I suspect that this will be the case. Good luck!
Howdy, ProfessorHafele!
— Good stuff. Statistically and conceptually right on. Thanks! —
Thanks for the kind words! I love the USEI, but I (probably) would ditch it in a New York minute were I able to convince our droogies at the U.S. Bureau of Economic Analysis to issue their reports on gross domestic product not quarterly but monthly. (I suspect the day after I return to the Big Database in the Sky is the day the BEA will change the frequency of its GDP reporting.)
Good luck!
J.J.
Howdy, DavidLMO!

— Well, the market has been doing a rolling over top now for 5 months. —
True.
— Just like the last two peaks margin debt is increasing and stocks aren't.
True, factoring in the divergence between the intraday and monthly share prices of SPY in 2000.
— Nothing new here, move along. :-) —
I’m unconvinced. Of course, the NYSE data for May could change my mind (meaning the domestic/foreign divide indicated by the Investment Company Institute data is a red herring in this context, which appears unlikely at the moment).
— More discussions tonight explaining to wife what a margin call is. —
Very wise. Let’s hope our highly leveraged droogies in the market are doing likewise. It’s the kind of conversation one would wish to have when it seems irrelevant.
Good luck!
J.J.
Howdy, Ivelin Tzontchev!

— I suspect that your correlation readings will significantly drop if you were to compare rates of change for SPY and USEI. —
Your suspicion is well-founded, based on my recollections of the percentage rate-of-change comparisons between the two variables I have carried out in the past, the last one likely conducted about two years ago. I believe one reason for the disparity between the SPY-USEI correlation coefficient derived from their levels and the SPY-USEI correlation coefficient derived from their percentage rates of change may center on their very different natures: Employing two decimal places, SPY is a theoretically infinite number with a positive value, and the USEI is a theoretically finite number with a positive value ranging from 0.00 to 100.00. Accordingly, one would anticipate the former’s percentage rate of change to be greater than the latter’s percentage rate of change, on average. And, in fact, this expectation was met during the first 89 months of the SPY-USEI relationship: SPY’s mean rate of change was 0.70 percent, and its standard deviation was 4.76 percent; the USEI’s mean rate of change was 0.30 percent, and its standard deviation was 3.36 percent.
— If this is true, then that makes me question the predictive power of the USEI. —
In terms of the predictive power of my SPY-USEI studies, it is helpful to keep in mind I consider the USEI “[a] coincident indicator of equity-market movements,” as mentioned in my article. Basically, I developed the USEI in an effort to encompass all American economic activity in a single monthly figure I could use as a guide in my investing and trading by answering the question: Are domestic economic conditions likely to act as a headwind or a tailwind for the equity market? As indicated in my piece, I expect these conditions are likely to act more as a headwind and less as a tailwind for the stock market this month.
Good luck!
J.J.
Howdy, DavidLMO!
— Margin debt at the last two peaks continued to rise while stocks plateaued and traded sideways in a channel for some time ~ 2 - 3 months or so. Doug Short has some interesting info. One thing that it shows is that the price in fact is not driven higher by increasing margin debt at the top. On the contrary - the added margin debt is simply used to buy shares from sellers at the top. Happened the last two market peaks. —
Concerning the first massive equity-market bubble associated with the 21st century, the level of NYSE margin debt peaked at about $278.53 billion in March 2000 and the adjusted closing monthly share price of SPY topped at $115.62 in August 2000 (although the ETF hit its intraday high of $155.75 March 24, when its adjusted closing daily share price was $116.27). Accordingly, margin debt could be interpreted as either a coincident indicator or a leading indicator in this case.
Concerning the second massive stock-market bubble associated with the 21st century, the level of NYSE margin debt peaked at about $381.37 billion in July 2007 and the adjusted closing monthly share price of SPY topped at $132.06 in October 2007 (as the ETF hit its intraday high of $157.52 Oct. 11, when its adjusted closing daily share price was $132.76). As a result, margin debt was a leading indicator in this case.
Concerning the third massive market bubble associated with the 21st century, my measurement of the aggregated behavioral divergence between NYSE margin debt (up a lot) and SPY (down a little) in the latest two reported months (i.e., March and April) in conjunction with other data has led me to at least consider the possibility that margin debt eventually may be parsed as either a coincident indicator or a lagging indicator in this case, depending on the movements of the two variables in future months.
Therefore, I believe there is a chance we could observe contemporaneously in proximity to the U.S. market peak an advance in NYSE margin debt and a decline in SPY, which is pretty weird.
Good luck!
J.J.
— Thank you J.J. Much appreciated. —
And thank you again for drawing my attention to the misplaced decimal points! Meanwhile, I noticed after posting my reply to your Comment that I made an error in that thing, too: The 2015 Q1 datum actually appears in Cell BG8. Therefore, I have resolved to avoid posting anything on Seeking Alpha until I have had my second bucket of coffee . . .
Howdy, davdeb1!
— I am far too conservative to take on margin debt. —
Your approach makes a lot of sense to me under the current circumstances.
— The big glaring thing I see is the last chart. It seems that a ominous cycle of 7-8 years is fast approaching. —
I agree the cyclical issue is one that should come into play, sooner rather than later, but the most glaring and ominous thing to me as an observer of the relationship between NYSE margin debt and SPY is their behavioral divergence during the latest two reported months (i.e., March and April), when margin debt rose by $42.22 billion, or 9.08 percent, and SPY fell by -$1.26, or -0.60 percent. As a result, there was a massive performance spread of 9.68 percentage points between them over this period, which appears bizarre in the extreme — and, paradoxically, likely to continue in future months.
Good luck!
J.J.
Howdy, avolossov!
— Nice article, thanks for posting. —
Thanks for the kind words!
— Where did you find $2,014.8 trillion and $2,140.3 trillion numbers? Just curious. —
And thanks for identifying my misplaced decimal points! As soon as our droogies at Seeking Alpha approve my correction of the above article, the relevant sentence should read, “The BEA's numbers Friday suggested these adjusted profits decreased to $2.0148 trillion in the first quarter from $2.1403 trillion in the fourth quarter, a dip of -$125.5 billion, or -5.86 percent, which is more than quadruple the size of the -1.40 percent drop in the previous quarter.”
Meanwhile, I find the BEA data through the following process:
1. I go to http://1.usa.gov/1KHyO1V.
2. I click on “Begin using the data . . .”
3. I click on “Section 6 - Income And Employment By Industry.”
4. I click on “Table 6.16D. Corporate Profits by Industry.”
5. I change the date range to the widest possible and click first on “Download” and then on “XLS.”
In the resultant spreadsheet (reporting the figures not in trillions of dollars but in billions of dollars), the 2014 Q4 datum appears in Cell BF8 and the 2015 Q1 datum appears in Cell BF9. (I am guessing you already know the locations of these data, but there may be some readers who find these details helpful.)
Good luck!
J.J.
Howdy, The Geoffster!
— Greece —
As the contestants on the Richard Dawson Edition of “Family Feud” used to say: Good answer!
Good luck!
J.J.
Howdy, brainleft!

— Who exactly is taking on all this margin debt? Big banks, insurance companies, brokerages, small investors; perhaps all of them. —
In terms of the aggregated movement in NYSE margin debt during the latest two reported months (i.e., March and April), I suspect institutional investors added to their speculative positions along the domestic/foreign divide more than did individual investors, but, of course, there is not enough granularity in the exchange’s data to prove it.
Good luck!
J.J.
Howdy, Tim1999!

— I conclude, based on the article, that as long as margin debt is increasing the signal is bullish. And a decrease in margin debt is a red flag. Is this correct? —
Ay caramba! Yours is an excellent question, and my answer today is different from the one I would have given three months ago.
1. I would begin by noting we should bear in mind that NYSE margin debt is not a short-term indicator but a long-term indicator of speculation both in SPY particularly and in the equity market generally. Accordingly, a behavioral divergence between margin debt and SPY in a single month — or even two consecutive months — does not necessarily strike me as indicative of a fundamental change in the flow of money either into or out of the stock market.
2. Bearing in mind the above-mentioned caveat, I would have answered your question three months ago by first saying, “Yes,” and then bloviating for a while about the necessity to observe in context the data on NYSE margin debt, which I personally do through my Margin Debt Directional Indicator.
3. Keeping in mind the above-mentioned points, I will answer your question today by emphasizing here the behavioral divergence between NYSE margin debt and SPY during the past two reported months (i.e., March and April): Margin debt rose by $42.22 billion, or 9.08 percent, and SPY fell by -$1.26, or -0.60 percent. Accordingly, there was a massive performance spread of 9.68 percentage points between them over this period, a spread best described at the moment as either abnormal or paranormal, depending on one’s belief system. Because of (A) this behavioral divergence, (B) the domestic/foreign divide laid bare by the Investment Company Institute data on the assets of exchange-traded funds by type and estimated flows to long-term mutual funds mentioned in my article above and (C) the current parameters of the European Central Bank’s quantitative-easing program mentioned in my piece on margin debt April 27 (http://bit.ly/1IiBe4Z) and (D) other factors beyond the scope of this discussion, I suspect we entered in March the most anomalous period in the history of the relationship between margin debt and SPY. As a result, I would be completely unsurprised to see contemporaneously in future months the level of margin debt increasing and the share price of SPY either flattening or decreasing. Weird? You bet!
Good luck!
J.J.
Howdy, rz2013!
— Excellent post as always. —
Thanks for the kind words!
— See also … NYSE Margin Debt Hits New Record High … Read on→ —
For one reason or another, the apparent link to Doug Short’s article in your Comment did not work for me, so anyone who would like to check out this very interesting piece by the guy with the best charts in the business can find it here: http://bit.ly/1SOvepa
Good luck!
J.J.
Howdy, xpan!

— The absolute data is meaningless. —
Actually, I consider it pretty meaningful in context.
— The chart (the last one) speaks for itself. —
I agree.
— You may want to try the margin-to-cap ratio, see if can make some sense. —
As I have mentioned on multiple occasions at Seeking Alpha, I would love to have free access to monthly data on the capitalization of the U.S. equity market. If you are aware of any, then please let me know.
Good luck!
J.J.
Howdy, koayyijie!
— Do we have May data? —
Alas, our droogies at the New York Stock Exchange furnish us with their data on securities market credit with a time lag of about a month. In April’s case, NYSE provided them Friday (i.e., with a time lag of 29 days). In May’s case, I will begin looking for their release around June 22.
Good luck!
J.J.
Howdy, Vivian Embro!

— High margin debt, easy money supplied by central banks, not very good corporate revenue reports and a weak GDP point to a major correction looming on the horizon. —
Your reasoning appears perfectly reasonable to me. Based on all available data, I anticipate the U.S. Bureau of Economic Analysis will report next month a contraction in corporate profits in Q1, which would mean they have fallen for two consecutive quarters.
— I personally like the market capitalization to GDP for a quick read on the health of the market. —
I like that one, too. Of course, I probably like even more the S&P 500's cyclically adjusted price-to-earnings ratio reported by 2013 Nobel Prize-winning economist Robert J. Shiller (http://bit.ly/1GHOdho), mainly because the former series is quarterly and the latter series is monthly.
— Frankly, I am surprised this highly overvalued market lasted this long, but then again, we never experienced central governments dumping cash into the markets. —
Quantitative easing indeed has skewed, is skewing and will skew valuations around the world. And there seems to be no end to it in sight.
Good luck!
J.J.
Howdy, financial wiz!

— Thank you for the post —
My pleasure.
— It goes without saying that eventually the market will fall, but with this "data", it doesn't say when it will start falling, and the rate of decline can not be predicted. Not really actionable. —
True today. Maybe true in a month. Perhaps true in two months. Possibly untrue at some other undetermined time. Generally, I find long-term market indicators completely useless, until the day when they are among the most fully useful ones in my toolbox. Via my monitoring of them in a systemic way, I historically have been able to identify this inflection point between uselessness and usefulness soon after it has been reached, which bolsters my comfort level vis-a-vis my portfolio holdings.
Good luck!
J.J.
Howdy, BionHoward!

— Why don't you account for the huge increase in the money supply? —
Good point. Of course, I would like to see a NYSE margin-debt/SPY (or equivalent) study along this line that incorporates not only the increase in the money supply but also the decrease in the velocity of money. Please let me know should you come across a freely available one on the Web.
Good luck!
J.J.
Howdy, rz2013!

— Great post as always —
Thanks for the kind words!

— I guess anyone who posts data that's says that there will never be a mean reverting event or end of a business cycle and that stocks must go up forever - is heresy. —
If William Shakespeare didn’t advise, “Neither a permabear nor a permabull be,” then he should have.
— Then again it's always possible folks believe the Clowns at the Fed and Central Banks have repelled the business cycle through money printing —
Well, I believe it would be fair to say Ben S. Bernanke, Janet L. Yellen & Co. have delayed (as opposed to “repelled”) the progression of the business and market cycles via their quantitative-easing and zero-interest-rate policies, and I think it is possible the Fed could do it again with the announcement of QE4 between now and the end of next year. Based on the Japanese experience with similar policies, however, it appears probable the U.S. eventually will come to a point where the nature of the smoke and mirrors is exposed for all to see. It will be bad, but, as a species, we have survived worse.
Good luck!
J.J.