Monday, May 6, 2013

NYSE Margin Debt Approaching 2007 High, Look How the S&P Reacted at Previous Extremes (Analysis)

NYSE margin debt outstanding is approaching the 2007 high. It hit $379.5 billion in March and a high of $381.3 billion in July 2007. And based on historical data via nyxdata and Yahoo Finance, every time margin debt went parabolic on the chart, the S&P 500 either peaked out 3-5 months later or corrected 17-20% in the weeks ahead (see 1987 and 2011). It is interesting that the 1987 stock market crash freaked leverage out pretty bad – see the divergence between the S&P 500 and margin debt between 1987 and 1990 (chart #3). So, with margin debt approaching the 2007 high, it makes sense to me that money managers are loving the market here. But of course, this time around the monetary base is moving in tandem (going vertical) with margin debt and the S&P 500, courtesy of the Federal Reserve's never ending quantitative easing program (QE). So, in my view, the printed money and margin debt are cruising together on a beta spaceship (S&P 500) with no resistance in sight, and desperately hoping (or maybe not) that they won't hit gravity or crash into an asteroid after 4.3 years.

Here is the info on money manager sentiment via the Barron's article "Dow 16,000" (April 22, 2013):

"The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years. What's more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year, notwithstanding a dismal week of selling that left the blue-chip index at 14,547.51 on Friday."

Here are charts and tables of NYSE Margin Debt (in millions) versus the S&P 500 going back to 1959.




Look how the market immediately crashed 20% when margin debt went vertical in 1987. The S&P actually peaked one month before margin debt did in 1987. As you can see in the chart above, leverage never really recovered from the crash until the early 90s, but the S&P recovered immediately. The Federal Reserve lowered the federal funds rate by 1/2-3/8 after the crash, so that probably helped juice stocks. Plus the secular bull market was alive and well at that time.



The market corrected 17% when margin debt went vertical in 2011.



After margin debt peaked in 3/2000, the bull market eventually peaked in 8/2000. So there was a 5 month lag.



Lastly, after margin debt peaked in 7/2007, the S&P peaked in 10/2007 (3 month lag). 



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