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Tuesday, October 11, 2016 10:19:39 AM
Is this ‘bone-chilling’ indicator really saying ‘sell’ stocks?
By Mark Hulbert
* October 11, 2016
Total margin debt is 7% below its all-time high
CHAPEL HILL, N.C. — Total NYSE margin debt is 7% below the all-time high set 18 months ago.
According to some, that means a bear market is way overdue.
That’s because margin debt typically peaks in advance of the stock market itself. In 2007, for example, margin debt peaked in July, three months before the bull market topping out in October. As Wolf Richter of the Wolf Street investment blog bluntly put it: Margin debt “has a bone-chilling habit of peaking right around the time stocks crash.”
Is there any way to escape this bearish fate?
Perhaps. You be the judge.
One counterargument is that a bear market has already occurred. According to the bull market calendar maintained by Ned Davis Research, in fact, a bear market began in May of last year—one month after margin debt peaked. That bear market ended this past February, according to the Ned Davis calendar. (See accompanying chart.)
If so, then it’s not particularly surprising that margin debt is below its April 2015 peak, since it takes time after a bear market ends for investors to once again feel comfortable going heavily on margin.
Others aren’t so sure that the May 2015-February 2016 decline was steep enough to let the stock market off the hook, however. Though the decline in the Russell 2000 RUT, -0.64% index of secondary stocks did exceed the 20% threshold to satisfy the semiofficial definition of a bear market, the broad market’s was not. The Wilshire 5000 W5000, -0.58% index, for example, fell by just 11% once you take dividends into account.
urthermore, the stock market today is significantly higher than where it stood at its May 2015 peak. The Wilshire 5000 is more than 6% higher, in fact. At comparable points of prior bull markets, margin debt either had exceeded its previous peak or was at least close to doing so. Not today.
Dennis Gartman, the institutional adviser and publisher of the Gartman Letter, confidently told clients over the weekend that the stock market can’t keep going higher in the face of margin debt so far below its previous peak: “This will not continue; it can’t.”
Adding to the mystery is that interest rates have remained at rock-bottom levels, making it cheaper than ever to borrow money in order to purchase stocks. Other things being equal, you’d therefore expect margin debt to be at or near all-time highs.
Another counterargument is that total margin debt currently is above its 12-month moving average. The basis for this counterargument is research conducted several decades ago by Norman Fosback, then the president of the Institute for Econometric Research.
In his investment textbook “Stock Market Logic,” he reported that: “If the current level of margin debt is above the 12-month average, the series is deemed to be in an uptrend, margin traders are buying, and stock prices should continue upward. By the same line of reasoning, sell signals are rendered when the current monthly reading is below the 12-month average. This is evidence of stock liquidation by margin traders, a phenomenon which usually spurs prices downward.”
Once again, however, one might not want to hang too much on this argument. Margin debt currently is only marginally above its 12-month average (see chart), and it has spent six of the last eight months below that average.
Perhaps the strongest counterargument is the statistical one that we don’t have sufficient data to be confident one way or the other. As Doug Short recently wrote in his excellent website Advisor Perspectives, “There are too few peak/trough episodes” in the historical data to confidently conclude that the latest data is “a leading indicator of a major selloff in U.S. equities.”
However, Short added, margin debt “is well off its record close in April of last year and showing a pattern similar to what we saw following the market peaks in 2000 and 2008. This has been an interesting indicator to watch in recent months and will certainly continue to bear close watching in the months ahead.”
http://www.marketwatch.com/story/is-this-bone-chilling-indicator-really-saying-sell-stocks-2016-10-11?siteid=rss&utm_source=tf
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By Mark Hulbert
* October 11, 2016
Total margin debt is 7% below its all-time high
CHAPEL HILL, N.C. — Total NYSE margin debt is 7% below the all-time high set 18 months ago.
According to some, that means a bear market is way overdue.
That’s because margin debt typically peaks in advance of the stock market itself. In 2007, for example, margin debt peaked in July, three months before the bull market topping out in October. As Wolf Richter of the Wolf Street investment blog bluntly put it: Margin debt “has a bone-chilling habit of peaking right around the time stocks crash.”
Is there any way to escape this bearish fate?
Perhaps. You be the judge.
One counterargument is that a bear market has already occurred. According to the bull market calendar maintained by Ned Davis Research, in fact, a bear market began in May of last year—one month after margin debt peaked. That bear market ended this past February, according to the Ned Davis calendar. (See accompanying chart.)
If so, then it’s not particularly surprising that margin debt is below its April 2015 peak, since it takes time after a bear market ends for investors to once again feel comfortable going heavily on margin.
Others aren’t so sure that the May 2015-February 2016 decline was steep enough to let the stock market off the hook, however. Though the decline in the Russell 2000 RUT, -0.64% index of secondary stocks did exceed the 20% threshold to satisfy the semiofficial definition of a bear market, the broad market’s was not. The Wilshire 5000 W5000, -0.58% index, for example, fell by just 11% once you take dividends into account.
urthermore, the stock market today is significantly higher than where it stood at its May 2015 peak. The Wilshire 5000 is more than 6% higher, in fact. At comparable points of prior bull markets, margin debt either had exceeded its previous peak or was at least close to doing so. Not today.
Dennis Gartman, the institutional adviser and publisher of the Gartman Letter, confidently told clients over the weekend that the stock market can’t keep going higher in the face of margin debt so far below its previous peak: “This will not continue; it can’t.”
Adding to the mystery is that interest rates have remained at rock-bottom levels, making it cheaper than ever to borrow money in order to purchase stocks. Other things being equal, you’d therefore expect margin debt to be at or near all-time highs.
Another counterargument is that total margin debt currently is above its 12-month moving average. The basis for this counterargument is research conducted several decades ago by Norman Fosback, then the president of the Institute for Econometric Research.
In his investment textbook “Stock Market Logic,” he reported that: “If the current level of margin debt is above the 12-month average, the series is deemed to be in an uptrend, margin traders are buying, and stock prices should continue upward. By the same line of reasoning, sell signals are rendered when the current monthly reading is below the 12-month average. This is evidence of stock liquidation by margin traders, a phenomenon which usually spurs prices downward.”
Once again, however, one might not want to hang too much on this argument. Margin debt currently is only marginally above its 12-month average (see chart), and it has spent six of the last eight months below that average.
Perhaps the strongest counterargument is the statistical one that we don’t have sufficient data to be confident one way or the other. As Doug Short recently wrote in his excellent website Advisor Perspectives, “There are too few peak/trough episodes” in the historical data to confidently conclude that the latest data is “a leading indicator of a major selloff in U.S. equities.”
However, Short added, margin debt “is well off its record close in April of last year and showing a pattern similar to what we saw following the market peaks in 2000 and 2008. This has been an interesting indicator to watch in recent months and will certainly continue to bear close watching in the months ahead.”
http://www.marketwatch.com/story/is-this-bone-chilling-indicator-really-saying-sell-stocks-2016-10-11?siteid=rss&utm_source=tf
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Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
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