BY: NICOLAS PIQUARD, CFA®, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
June 19, 2017
I have seen rumblings in the press recently that we are setting new highs in borrowed margin, based on New York Stock Exchange (“NYSE”) data. The theory goes like this: As more people borrow on margin to purchase stocks, they will be less able to navigate a down-move in equities. In turn, this will create increased and forced selling on the way down. Additionally, margin trading is associated with speculators who are chasing returns, and will be quick to get out.
The current NYSE Margin Chart looks something like this:
NYSE Member Firms Debit Balances in Margin Accounts (January 1992 – April 2017)
Market participants will point out that margin debt warned investors during the respective 2000 and 2007 crises, as they peaked out before the SPX. In fact, by adding the SPX to the chart above, that’s exactly what we see:
NYSE Member Firms Debit Balances in Margin Accounts (January 1992 – April 2017) (RHS) S&P 500 INDEX (January 1992 – April 2017) (LHS)
The problem of course, is that the last record was broken in 2013 and the markets have been going on a tear ever since. As well, there’s the problem that margin debt increased relentlessly to new records between 1991 and 2000 – but the market never paused during that time frame either. Therefore, is this a useful indicator?
Perhaps this can still be a useful indicator if we look at it in a different way.
NYSE Member Firms Debit Balances in Margin Accounts 30 DAY Rate of Change (ROC) (January 1992 – April 2017)
In the chart above, I added the rate of change (“ROC”) indicator over three months. It calculates the rate of change of margin debt over the previous three months. This shows that margin debt increased by close to 30 percent over a three-month period in January 2000 and in June 2007. To me, a 30% increase in margin debt over a three-month period definitely means there’s a lot more speculation than normal and in both these cases, this signalled near market tops.
Currently, margin debt has only increased by seven percent over the past three months. Perhaps this market still hasn’t entered the speculative blow-off phase yet.
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