Investors who use margin debt pledge their securities in exchange for loans from brokers to buy more securities or sell short a stock. Usually, total margin debt increases as stock markets rise and decline in stock bear markets.
The chart of margin debt compared to the S&P 500 (SPX) from Advisor Perspectives shows the relationship since 1997.
Note that the chart is adjusted to present – day dollars and illustrates the SPX October 2007 peak lower than the March 2000 peak. In non – adjusted dollars the SPX 2007 peak was marginally above the 2000 top.
The margin debt peak in March 2000 came just before the major SPX bull market top. The July 2007 margin climax was three months before the SPX 2002 to 2007 bull market top. The early 2015 margin peak preceded an SPX multi month correction, and the January 2018 margin top was just before the February 2018 micro crash.
The chart shows margin debt up to February 2021. Margin debt data is released a few weeks after the end of a month. March data should be coming soon. Note it’s not necessary for the margin debt peak to coincide exactly with the SPX top. In 2007 margin debt decline slightly at the October 2007 SPX top.
Margin debt is not a precise timing indicator, and it could continue rising for several months. The recent high in margin debt is far above the prior top made in early 2018 and indicates the SPX could be in an area for a significant top.
Other data recently released also indicates a sentiment extreme.
According to Bank of America, more money, 569 billion has gone into stock equity funds in the last 5 months, than had gone into stock equity funds in the last 12 Years, 452 billion.
This data is mind boggling and illustrates the complacency of the general investing public towards stock market risk. In my 03/02/21 blog “Market Vane Bullish Consensus for US Stocks” noted Market Vane was a poll of professional traders, and that a poll of non-professionals would probably show maximum readings for non – professionals. The equity fund data is a powerful contrary indicator. If the ignorant general public is this eager for stocks you have to be suspicious, perhaps something else is happening, maybe a major stock market top.
The margin debt data and equity fund purchases could continue growing. Could the US stock market keep climbing for months or even years? My next blog – later today will examine this possibility.