NYSE Margin Debt is an important indicator for US equities as it both reflects sentiment and tracks the amount of leverage and buying power (or lack thereof) in the market. The leverage aspect is important because as leverage rises so too does risk – in many ways the signal is similar to that of valuations in that higher valuations, all else equal, tend to mean higher risk over the medium term.
Thus it is interesting to note that US margin debt reached a new all time high in September (note the data comes out monthly with a lag, so the September data is the latest and was out last week). Looking at the chart of us stock market margin debt you can see that peaks in margin debt or new highs in margin debt were often present around major market tops. Indeed, many have pointed to this chart as a sign of investor euphoria and something to be mindful of from a risk management standpoint.
However, like many forms of market and economic data it is useful to transform it in order to obtain a more useful signal. In this case we take the annual change in margin debt - referring to this as margin debt acceleration. There are two warning signs for this one; a. when it spikes to extreme levels of acceleration, and b. when it rolls over and goes negative. At this point it has rolled over and so is on a watching brief.
Alkeon on why this is one of the best eras for stock picking ever [Q4 Letter]
Alkeon Growth Partners was up 11.42% net for the fourth quarter, bringing its full-year return to 54.4% for 2020. The MSCI AC World returned 14.35% for the fourth quarter and 14.34% for the full year. Q4 2020 hedge fund letters, conferences and more The best environment for stock picking In their fourth-quarter letter to Read More
NYSE margin debt has reached a new all time high, raising concerns about a potential market top.
A more useful expression of this data is the annual percentage change or "acceleration" and at this point it has rolled over which is a mild warning sign, which would intensify as a bearish signal should it turn negative. This is one risk indicator to have as part of your toolkit.
For more and deeper insights on global economics and asset allocation, and some more good charts you may want to subscribe to the Weekly Macro Themes. Click through for free look or a trial.