Based upon statistics from the New York Stock Exchange (NYSE), Margin Debt is approaching all-time high levels. In this post, I present the data graphically and help explain what you should know about Margin Debt.
Per the NYSE, member organizations are required to report monthly their aggregate debits (amount borrowed by customers to purchase securities) in margin accounts, as well as aggregate free credits (cash balances) in cash and margin accounts.
The last time we witnessed Margin Debt at these levels was the summer of 2007. Margin Debt peaked out at or near the zenith in equity prices as measured by the Standard & Poors 500 Index.
Because of the Monthly release of data, using margin debt as a market timing tool has its flaws. However, not knowing about this indicator and the current extreme could leave one exposed to a change in the trend of the market.
Let’s look at the data another way, focusing on the Net Worth of Margin Accounts. Net worth is calculated by taking the (Free Credit Cash accounts + Credit Balances in Margin Accounts) and subtracting this figure by the overall Margin Debt. At present, Margin accounts have a negative net position.
Again we see a graphic that suggests, at least based upon historical precedent, that when the Net Worth of Margin Accounts is negative, equity prices have struggled to continue their move higher.
A few additional stats I found of interest while analyzing the data.
- Margin Debt is 4% shy of its all-time record peak in July, 2007
- Over the past year, Margin Debt has increased 23.7%
- From trough to peak, 2002 – 2007, margin debt increased 193%
- From trough to peak, 2009 – 2013, margin debt has increased 111%
So while absolute levels of Margin Debt and equity prices have returned to climax levels, the surge in Margin Debt commensurate with advancing equity prices is still below (on a percentage basis) the boost we witnessed in previous bull market.
All in all, while an interesting data point and statistic to monitor, I am unsure if using Margin Debt as a “timing” tool is wise. It is however, an indicator that both Bulls and Bears alike should be aware of due to its previous prowess in mirroring underlying equity strength or weakness.
Thanks for your time today and let us know what you think in the comment section below.