- It is apparent that the market's move up in the last 6-8 months has come on the heels of a vertical rise in margin.
- When margin increases vertically, as right now, the market becomes toppish and vulnerable to forced liquidations (margin selling).
P.S. Below is an updated version of the chart, current to May 2007 (latest data available from NYSE). In just one month margin debt jumped by $35 billion, or 11%. Vertical, indeed. I have also added an exponential trendline, for comparison.
Also, notice this interesting coincidence:
- In the previous period of near vertical margin growth (Oct. 1998- March 2000 = 17 mos.) margin balances grew by 113%, or 80% annualized.
- In this current run (Aug. 2006 - May 2007 = 9 mos.) margin balances grew by 56%, or 75% annualized. .. and we don't have the June data yet.
P.P.S. The nature of the NYSE margin data is such that it portrays mostly retail and small money manager borrowing. Hedge funds and other large sophisticated speculators usually borrow from other sources (e.g. they use bank credit lines and trading limits).
Therefore, I must conclude from the above chart that the retail speculator is jumping back into action in a serious way. Just in time to take advantage of the serious underpricing in equities, eh?