Bill L.'s  Instablog

Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • NYSE Margin Near All Time Highs 0 comments
    Feb 20, 2013 6:51 PM | about stocks: SPY, DIA, QQQ, IWM, XLF, TLT, SDS, VXX

    So I've taken a little hiatus from the daily update because I wanted to point out some of the longer term indicators I watch but don't speak about too often. Which brings me to margin debt. I always seem to get the most pointed and emotional criticisms at major inflection points. Probably because I'm a contrarian at these points, and those who don't agree have a lot on the line. How much? Well, just about the most ever according to data from the NYSE.

    I keep a spread sheet of NYSE margin debt, you know, for fun. It's a very long term indicator, and not very "trade-able". But as a long term windsock of sorts, it can clue you in to when the term trend is getting long in the tooth.

    Chart 1: NYSE Margin Debt (NYSE:MM)

    (click to enlarge)Notes: We can see from the chart above that the amount of margin debt in nominal terms has already exceeded the level that corresponded to the 2000 bubble, and is quickly approaching the 2007 highs.

    Chart 2: NYSE Margin Debt, Inflation Adjusted

    That said, $325 billion ain't what it used to be. We've endured quite a bit of inflation, thank you Fed, so I decided to adjust for inflation using the CPI and 1995 of my base year.

    (click to enlarge)Notes: So here we can see that margin debt in terms of 1995 constant dollars hasn't risen as high as either bubble peaks. The market seems to peak when we get to that $250 billion range and we're not quite there yet. That said, the economy was a lot stronger in 2007, and stronger still in 2000. Like I said, this data isn't very trade-able, meaning it gets to X and you automatically do Y. Still, whether you're looking at the nominal or real amount of margin debt, things are getting interesting...

    -Bill L.

    Disclosure: I am short SPY.

    Stocks: SPY, DIA, QQQ, IWM, XLF, TLT, SDS, VXX
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