Margin debt at the New York Stock Exchange may have begun an anticipated long-term slide as it tumbled to about $450.28 billion in March from its all-time high of about $465.72 billion in February. The decline came as the SPDR S&P 500 ETF's (NYSEARCA:SPY) adjusted monthly closing share price advanced to $187.01 from $185.47.
NYSE margin debt previously reached nominal record high levels for six consecutive months before its recently recorded dip of -$15.44 billion, or -3.31 percent. In both dollar and percentage terms, it was the biggest drop in margin debt since May 2012, when it sank to $279.17 billion from $298.50 billion, a fall of -$19.33 billion, or -6.48 percent.
The last time NYSE margin debt had not increased but decreased was in June, when it slipped to $376.63 billion from $377.00 billion.
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. Many equity-market participants consider it a gauge of speculation in the stock market. The U.S. Federal Reserve currently has the initial margin requirement set at 50 percent.
There is a strong positive correlation between NYSE margin debt and SPY, so it is unsurprising excellent coincident or leading indicators of long-term movements in the exchange-traded fund based on the S&P 500 have been built employing NYSE data on securities market credit in general and margin debt in particular.
My own analyses of the relevant NYSE data series historically have focused 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, April 2013-March 2014
Source: This chart is based on a proprietary analysis of monthly margin-debt data at NYSE's online site.
The MDDI centers on 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 March value is 170, which is lower than its February value of 171 but higher than its six-month SMA of 169.17, so I consider the market to have been in weakly bullish mode as of March 31. Accordingly, I am on high alert for a possible change in mode, sooner rather than later.
Figure 2: Highest- And Lowest-Risk Months, Per SMC Risk Rank
Source: This table is based on proprietary analyses of monthly securities-market-credit data at NYSE's online site.
March is No. 55 among all 134 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. Despite a certain amount of derisking in March, December 2013 is No. 1 and February 2014 is No. 2 among all the months put through the wringer (Figure 2).
A high SMC Risk Rank for a given month suggests the stock 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-March 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and adjusted monthly SPY data at Yahoo Finance.
As mentioned previously, there is a strong positive correlation between NYSE margin debt and SPY, whose coefficient I calculate as 0.96 from February 1993 to March 2014 (Figure 3). Therefore, I expect this relationship to reassert itself soon.
Contributing to this expectation are the ETF's seasonal tendencies described in "SPY Seasonality: Share Price Cools Down While U.S. Air Temperature Heats Up" recently; the U.S. Bureau of Economic Analysis' abysmal report about the gross domestic product in the first quarter on Wednesday morning; and the Federal Open Market Committee's statement about its current quantitative-easing program on Wednesday afternoon.
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: I am long SDS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.