I been taking note of margin debt, now recorded monthly by FINRA, since last spring with the warning that it was at astronomical levels in relation to itself in 2000 and 2007.
One early post solely on margin debt this spring noted that the market was likely to make new highs while margin debt failed to the do the same (see the charts below). It is difficult to time precisely when this distribution is going to matter since it is always reported a month late. During lag, one can only speculate what it going on it with behind the scenes, so to speak.
Linked here,I called that:
Declining Margin Debt – the bullish scenario
And linked here more recently on October 1, it was suggested this may be the month when debt takes its toll:
Margin Debt – a sign of quiet desperation?
It’s been noted in posts here that even as the market moved up to new highs it appeared during the day that there was selling going on. I guessed that was big players were trying to edge off margin debt. Behind the scenes the advancing stocks were narrowing, the new lows at the bottom of the market were beginning to outpace the new highs at the top. Everywhere there were signs – wackiness was going on all over the place., marijuana stocks became the leading sector, some low priced stocks, like YECO, would go up 500 percent (in a day!); one by one bellwether stocks, FB, NFLX, TSLA, AMZN and finally even AAPL took hits; the housing stocks have been declining all year and finally banking stock have joined them.
In that October post above, I called this late stage the “most bearish bull market” I’ve seen.
But now margin debt is finally the revealed rub.
Each time the levels of margin debt in 2000 and 2007 became unsustainable, the subsequent decline led to bear markets in which the S&P 500 index declined 40% to 50% (see the charts below), and now when it drops it will be dropping from an even higher height.
Can a 40-50% bear market happen again? You can bet half your portfolio on it.
Once margin debt begins to unravel, it will feed on itself — when the margin calls come, it is either put up more money or sell the stock. Selling the stock drives it lower and brings more margin calls. Nothing else will matter, not fundamentals, not news, not hopes, not dreams.
Why is this important? Depends on one’s age. When it happens, it will take years and years – five years? eight years? 13 years? – to recover the prices the indexes are at right now.
It appears, now that we can see the new high in the market and the fact the margin debt did not follow, that process has begun behind the scenes, so to speak.
Of course big bull markets can fool (see 2016 in this one on the charts below), and might try soon since the market is currently deeply oversold and the Christmas season is traditionally bullish, but it can’t fool history forever. History is the best indicator of the fear-greed-time market psychology there is since it repeats and rhymes all through time. In the end history will tell.
(click on the charts for a larger view)