“Davidson” comments on this and I have some after the image.
This chart of the record of use of margin debt by Hays Advisory reveals a fascinating view of the relationship of the SP500 vs. Margin Yr/Yr Change and the signals provided for tops and bottoms.
This chart says volumes regarding the effects of investors’ appetites for risk, how rapidly it can build and signal tops, how the rise in risk appetite can signal market recovery.
This is an interesting relationship and one that makes sense regarding market attitudes at tops and bottoms. The current rise in margin debt does fit other leading indicators which suggest changes in investor attitudes.
This is in my view a useful as well as fascinating indicator to watch.
This does bear close watching. I would focus on the relationship since the explosion of the “guy next door” investor. It, in my opinion gives a better sample of behavior.
If we accept that and use it as a guide, then the last recession was the 2001-2002 on. Looking at the peaks in the market in both 2001 ans 2008, the both correlate almost exactly with the peak in margin debt. This makes sense because margin selling is fast and furious so as it fell, the market would follow violently.
But, we are not interested in that now are we? We want to know about bottoms. Again going back to 2001-2002, we see a lag from when margin debt begins to again increase until the market turns. This also makes sense as recently burned buyers will tip-toe back into the market using margin gingerly and that means any rally will lag their entry.
Using that as a guide, it looks as though we can look for the market to gain more permanent footing in 6 months to a year. Now, while I do not as a rule place too much faith in charts, margin charts are useful because they go directly to investor sentiment. A confident investor is more likely to use larger margin amounts to purchase stocks that one who is pessimistic about the future.
Like any indicator this is not perfect and does bear close watching. It does give us more confidence though that the worst of the market may be over but, a true recovery in equities may be of a bit….
Disclosure (“none” means no position):
3 replies on “Margins Levels vs S&P 500”
Where do you find margin yr/yr change?
In late 2001, the rate of change hits its low. In late 2002-early 2003, the market bottoms. That is a long distance and a lot of pain, and it takes until 2004 to get back to your entry point.
Seems like the best entry point is when margin debt turns positive YOY. We have a way to go to get there.
anon,
hayes advisory
widemoat
agreed. can see a real scenario where we just go from 7500 to 8500 on the dow for a year or two