Margin Debt at Dangerous Levels
NYSE margin debt is at all-time highs as illustrated by the accompanying “Margin Debt” chart (labeled “MARGDEBT” above). This is an indication of leverage and froth in the market place. The “MARGFREE” chart shown below represents the existing free credit balances of all NYSE margin accounts. Notice the spike in margin credits (cash) in late 2007/early 2008. This is entirely indicative of clearing firm (broker dealer) margin clerks forcing liquidation of margin accounts whose holders are locked out of the market due to the rapid change in market risk again forcing liquidation.
The third and final chart “MARGCRBL” illustrates the cash balances of non-margin accounts. As you can see, the more conservative unleveraged accounts are already exiting long stocks and headed to cash as a defensive cover. What all of this suggests is not that the market will, or is about to, correct more that -20%, it is purely indicative that “event risk” is always present (and must be paid attention to) as people become complacent while markets maintain an unrealistic non-growth related rally. Stated differently, a margin liquidation event has the potential downside risk of equity prices exceeding a -20% corrective move based on some type of extraneous news or event. We will remain diligent in our research looking for outside events that could disrupt the markets.
