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Soaring margin debt (and plunging cash balances) trigger a sell signal at BAML, which says the...

Soaring margin debt (and plunging cash balances) trigger a sell signal at BAML, which says the last time this big a move happend was April 2010 - just ahead of a 2-month, 16% decline in SPY. Alongside this is short-term sentiment which has risen to levels consistent with selloffs in the past.
Comments (25)
  • "But the last time it rained for seven days in a row, the eighth day was sunny..." -- Noah
    12 Mar 2013, 03:28 PM Reply Like
  • 40 days, Tommy. 40 days,and 40 nights.
    13 Mar 2013, 06:00 AM Reply Like
  • As a practicing non-Christian, I know it's 40 and 40 but my point is that you can't always predict the future -exactly- because of what happened in the past.
    13 Mar 2013, 08:35 AM Reply Like
  • Need a match...
    12 Mar 2013, 03:46 PM Reply Like
  • In April-June 2010 the market sold off for the simple reason that people freaked out at the impending end of QE2, fearing the end of the world. It had nothing to do with margins or cash balances. If folks wish to ignore the underlying realities and just plot graphs, go right ahead, but don't be surprised when the market behaves differently.
    12 Mar 2013, 04:32 PM Reply Like
  • So it's all good.
    13 Mar 2013, 02:18 AM Reply Like
  • Spiking margin debt has been correlated with selloffs - look at a multi-decade chart.
    12 Mar 2013, 04:45 PM Reply Like
  • White:


    Of course, margin debt is correlated with sell-offs because, by definition, it must fall when market prices fall, due to margin calls. That doesn't mean that it causes market declines any more than firemen showing up at fires cause them.


    One must look for other underlying reasons for declines, and in spring 2010 (QE2) and summer 2011 (debt ceiling), we can find them. So, if one can find a new triggering event, then, sure enough, markets and margin debt will be correlated, again, Imagine that.
    12 Mar 2013, 04:54 PM Reply Like
  • Tack,


    Your argument would make sense if you could find other periods where margin debt was this high and no correction occurred. However, they do not exist, high margin debt is correlated with large sell-offs. It's true a correlative factor does not necessarily indicate causation, but you would need to find events when margin debt was this high and no sell-off ensured. There are plenty of other divergences suggesting a trigger is waiting to fire - high yield bond performance tanking (HYG down 1.74% today, very low GDP, global economy faltering, and per-capita income falling).
    When the margin debt is this high, it only takes a small trigger to cause a big avalanche. Could be another event in the EURO zone, a war, or an unexpected economic US reading. The low VIX compounds the degree of fall as well. The signs are pretty clear of at least 10% correction. There is still the gap from Jan 2 to fill. That would fit in pretty well with a 10% decline.
    12 Mar 2013, 07:28 PM Reply Like
  • Bob:


    Again, by definition, margin debt is always high when markets are at peaks. But, that doesn't mean that a sell-off is imminent; it just means that, sure enough, markets and margin debt will fall in tandem, just as they rise in tandem. if one wished to suggest that margin debt was causative in and of itself, then it would have to be shown that a large sell-off was precipitated absent any other causative factors. I doubt that can be done.


    This is just more of the usual nervousness, e.g., VIX is low, so there's danger; margin debt is high, so there's danger, etc. One day, sure enough, we'll fall, and, maybe, some folks want to huddle in cash and wait, but that's not how I invest.


    Personally, I still see huge capital imbalances, margin debt notwithstanding. Sure, a huge "black swan" could ignite a sell-off, but so what? Isn't that like every other day of the year?
    12 Mar 2013, 07:40 PM Reply Like
  • As aptly pointed out by bobdark, high/spiking margin debt can pronounce market instabilities; a selloff can be triggered by overbought conditions and not some other exogenous event. Spring 2010 we did not have QE2, so I don't know what your point is.
    12 Mar 2013, 08:41 PM Reply Like
  • No it isn't like every other day of the year. When leveraged traders are overextended, moves to the downside get much more violent. Look at gold and silver in September 2011. That's what happens when leveraged traders all liquidate at the same time.


    So yes, margin debt and equities move up and down together, but when margin debt is high, this is another indicator of excessive optimism in the market, just like when the VIX is high but falling, this is a good sign that the rally will continue. Contrarians look for indicators that things have gotten out of wack to either the downside or the upside. Excessive leverage on the upside definitely qualifies as a sign that equities may be overbought.
    12 Mar 2013, 08:50 PM Reply Like
  • Tack: You are absolutely right. High margin debt does not cause stocks to fall. What causes stocks to fall? Human emotion; fear. Does there need to be a trigger? No. The lead seller sells and then the second seller sells, and then the third; and fear sets into the markets. And then a lot of people want to sell, afraid they will lose their gains. Then comes margin calls. And then we have a rolling collapse of the markets. The markets would not fall so hard so fast without this massive amount of margin. Yes, margin doesn't cause stocks to fall, but it makes the fall much worse. It also makes the institutions holding the debt more likely to fail. It's a house of cards. High margin is why brokerages fail also.
    2 May 2013, 09:24 AM Reply Like
  • Margin debt is margin debt. You always buy when your account is increasing and you always sell as it is decreasing. No one will ring a bell at the top and say sell, but when the selling begins it will snowball.


    Thanks to mr. margin clerk!
    12 Mar 2013, 04:45 PM Reply Like
  • That's why this is a stock picker's market.
    12 Mar 2013, 04:53 PM Reply Like
  • Truckers do well, that's always a good sign to me. Dr. Trucker instead of Dr. Copper:
    and above all, VIX is historically low now.
    12 Mar 2013, 05:30 PM Reply Like
  • Looking at a daily chart of SPY for the last 2 years:


    Every time SPY (156) got this far above the upper Bollinger band (153) using 50 DMA it corrected to at least its 200 DMA (142) within a couple of months. Currently that would be about a 9% correction in SPY by around June 1st (an 18% gain if one used SDS).
    12 Mar 2013, 05:36 PM Reply Like
  • Amc - just a verification, are you using one sigma on BB or two?
    12 Mar 2013, 07:05 PM Reply Like
  • correlation does not necessarily equal causation
    12 Mar 2013, 06:00 PM Reply Like
  • True, but AMC uses b bands and they are all about probabilities. Likewise a flush is not the highest and in poker (royal flush is) but the probability is very high that other hands are lower. Now you have 3 cards in a royal flush and two cards down. So, if your a betting man then, would you go all in or hedge.
    12 Mar 2013, 06:22 PM Reply Like
  • I would suggest that margin debt was extended as hell in every extended bull run and that everyone is terrified of the number 14,000.
    12 Mar 2013, 09:25 PM Reply Like
  • It's cheaper debt than in the past, I'm not running for the door yet.....
    12 Mar 2013, 11:33 PM Reply Like
  • Good comments everyone. Studied the steepness of this run. Looked at 1/2% corrections and 3% corrections --- in the best market run ever (06/07)--- there were more. Unfortunately folks, this market is going down. There is no way a technician can say, this economy is better than the 2006/2007 (the false one). There were more 1/2% and 3% corrections during that run This one is too steep. Again, that was the best (false) market in history. Remember, nothing was wrong in the world in 2006/2007 but there were 1/2% and 3% check ups. This one....2013 no check ups. Going down soon folks. Goldman is running the show picking 1600 and 1700 this year. Getting everyone on board and pulling the cord. Then saying they "no one would have predicted Japan and China have serious issues over that small island. That will be the stupid story that will bring it down.....or something just as lame. Goldman always has excuses. I love the one about, we need to pull back to go forward. That's junk. The market has never done that yet. Please prove the pullback allows the market to move higher..... better yet, show me the chart but, you need to show me the "news" stories at the time. It is the "rumors" that bring it down and the pump that starts it again. Not, responsible analytical trading.
    13 Mar 2013, 05:10 AM Reply Like
  • Hmmmm... and if the market does correct by 16%, what would be the best way to play this? Puts? Calls on the VIX? Go to cash and wait it out?
    13 Mar 2013, 06:29 AM Reply Like
  • This on SA from Besoke today on BB and over bought market:



    PS-my previous post on this article used a single set of BB (1 SD)
    13 Mar 2013, 03:06 PM Reply Like
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