Raleigh-Durham Trading and Investing Stock/Future/Option/FX Message Board Trading Discussions › Leverage (Margin Debt) as a predictor of major turning points in the market

Leverage (Margin Debt) as a predictor of major turning points in the market

Dr. Jose' R.
Skeptic
Cary, NC
Post #: 698
Thank you Don for the great link to the NYSE margin data (http://www.nyse.com/f...­, which I found very useful, as well as the other articles. I took the time to plot (on a logarithmic scale) the data from the NYSE, and I annotated various peaks and troughs:

http://files.meetup.c...­



Not surprisingly zerohedge (http://www.zerohedge....­) is somewhat exaggerating the importance of this most recent peak

(ZeroHedge 11/07/2012 13:46 -0500) As can be seen on the table below, Margin Debt as of 9/30 hit $315 billion: a jump of $30 billion from the prior month, and the highest since March 2011

Looking at my graph (at the top of this reply), when properly plotted on a logarithmic scale, the recent 9/30/12 $315 billion "peak" is a relatively small bump, and nothing compared with the peaks that preceded large market crashes. Not really a big deal when seen in the proper (long-term logarithmic) context.
Don B.
DonBrady
Group Organizer
Cary, NC
Post #: 1,034
Very good - that's a very nice chart.

There could be some complicating factors in interpreting it, though:

- The general public is not so heavily invested right now and they may have been the largest users of margin debt in the past. Would we expect that the general public needs to be invested for a market top to eventually occur in the current managed-low-interest environment?. Maybe so - I just do not know.

- There may be some newer "creative" forms of leverage that have replaced conventional margining to some extent. That is, would (re-)hypothecation necessarily show up in these statistics? Other examples might be CFD's (for non-U.S. investors) and options which arguably might now provide alternative ways to lever up.

Any thoughts?

-

Dr. Jose' R.
Skeptic
Cary, NC
Post #: 700
The correlation coefficient (R^2) of 95% (look at the upper left hand corner of my chart) shows an overwhelming exponential long-term trend. In addition, it is known that the margin debt should be plotted in logarithmic coordinates, since it must grow exponentially. It is clear to me that ZeroHedge is exaggerating the importance of this latest bump in margin debt by plotting it in a linear scale and not taking into account the long-term trend.

I get a feeling of the sky is falling from the articles in blogs like ZeroHedge, (I guess that they do this to maintain a high readership), and it is always good to take a long-term viewpoint and to think for ourselves to put things in their proper context and therefore make money in the market.


Don B.
DonBrady
Group Organizer
Cary, NC
Post #: 1,091
Here is a very interesting update on this subject:

http://advisorperspec...­

"NYSE Margin Debt: Was April a Cyclical Peak?"
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