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.
The recent two-month decline in NYSE margin debt is the steepest observed in the data series since the SPDR S&P 500 ETF's (SPY) bear market in 2011, when on an intraday basis SPY dipped to $107.43 on Oct. 4 from $137.18 on May 2, a drop of $29.75, or 21.69 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 main 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, May 2013-April 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 April value is 169, which is lower than both its March value of 170 and its six-month SMA of 169.50, so I consider the market to have switched modes as of April 30. My bias has been reinforced by other data, with one series discussed in "SPDR S&P 500 ETF Coppock Guide: Nonbullish as of May Day 2014."
Of course, there is a possibility of whipsawing, which happened as recently as May, June and July of last year.
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.
April is No. 53 among all 135 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 during the past two months, December 2013 is No. 1 and February 2014 is No. 2 among all months ranked (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-April 2014
Source: This chart is based on monthly margin-debt data at NYSE's online site and adjusted monthly SPY data at Yahoo Finance.
Documenting the strong positive correlation between NYSE margin debt and SPY, I calculate the coefficient between them as 0.97 from January 1993 to April 2014 (Figure 3). Therefore, I anticipate this relationship may reassert itself soon, especially given the ETF's seasonal tendencies described in "SPY Seasonality: Share Price Cools Down While U.S. Air Temperature Heats Up" and the U.S. Federal Open Market Committee's actual and projected cuts in its current quantitative-easing program.
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.
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