NYSE Margin Debt
We recently wrote about the increasing level of NYSE Margin Debt outstanding. This has continued to ramp sharply over the last couple of months and has now reached levels that have been, over the last decade, where market tops have usually been sighted.
As we pointed out previously, if we look at the 6-month rolling rate of change in the amount of margin debt that is outstanding on the NYSE this can give us some clues as to market behavior. The chart shows that when the 6-month rate of change in margin debt begins to exceed 23% this has been normally associated with speculative increases in market participation which are commonly found around market peaks.
While just broaching this level is not indicative of immediate corrective market action it is a warning sign that should be paid attention to. Remember, in investing, the goal is to monitor the gathering storm clouds and then find the saftey of shelter BEFORE the actual storm hits.
Today, Doug Short at www.dshort.com (a daily required read) wrote a great piece quoting what we have been talking about here. CLICK HERE TO READ: NYSE Investor Credit and the Market: Another Caution Signal
Doug states: "Thus, even though it may in theory be a leading indicator, a major shift in margin debt won't be immediately evident. Nevertheless, the magnitude of the latest negative credit level is comparable to the maximum debt reached four months before the 2007 market peak. I see this as yet another caution light for investor expectations."
We obviously agree.