Doug Short | Mar 31, 2015 12:40AM ET
Note from dshort: The NYSE has released new data for margin debt, now available through February. I've updated the charts in this commentary to include the latest numbers.
The New York Stock Exchange publishes end-of-month data for margin debt on the NYX data website , where we can also find historical data back to 1959. Let's examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter.
The first chart shows the two series in real terms — adjusted for inflation to today's dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July 2007, three months before the market peak.
Debt hit a trough in February 2009, a month before the March market bottom. It then began another major cycle of increase.
The Latest Margin Data
Unfortunately, the NYSE margin debt data is about a month old when it is published. The latest debt level is 0.17% below its nominal high set one year ago. However, real (inflation-adjusted) debt rose 4.07% month-over-month and is hovering a mere 0.14% off its record high set in February 2014.
NYSE Investor Credit
Lance Roberts of STA Wealth Management analyzes margin debt in the larger context that includes free cash accounts and credit balances in margin accounts. Essentially, he calculates the Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt. The chart below illustrates the mathematics of Credit Balance with an overlay of the S&P 500. Note that the chart below is based on nominal data, not adjusted for inflation.
There are too few peak/trough episodes in this overlay series to take the latest credit-balance data as a leading indicator of a major selloff in U.S. equities. But we'll definitely want to keep an eye on this metric in the months ahead.
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