S&P500 vs Margin Debt

In The Highstreet Group by John Bartoletta


The first chart represents the 16-18 year Secular Bull and Bear markets. This chart reflects our long-term secular and short-term cyclical market strategy that we have talked about over the last 8 months. We are forecasting the end of a (16 to 18 year) secular bear market cycle. These cycles historically are followed by a (16 to 18 year) secular bull cycle, within which shorter term cyclical bull and bear cycles develop. The graph is a macro view of the patterns that are developing which could result in the positioning of our overall portfolios. Our overall strategy is to position our portfolios properly to take advantage of these cyclical changes. With that said we have recently (since the last week of July) been calling for a short-term (cyclical) -9% correction due to multiple factors that we track, slower corporate earnings, seasonality, Fed tapering and a market that is at a record price level versus its own 200 day moving average.

The second chart is another indicator that makes us extremely cautious and confirms our research with respect to a potential market correction. Large changes in NYSE margin debt may help identify reversals in the S&P 500 index six-to-seven months in advance. This monthly chart shows the S&P 500 index in black and NYSE margin debt in blue. The vertical lines in violet indicate when NYSE margin debt’s monthly change exceeded 10 percent. The red vertical line shows the peak in the S&P 500 index after margin debt changes exceeded 10 percent.

There were seven months between the peaks in margin debt in 1999 before the S&P 500 index moved lower in 2000. As the middle of the chart shows, there were six months between peaks in margin debt in 2006 and 2007, before the index declined in 2007. NYSE margin debt more recently peaked in January 2013. History suggests that while margin debt appears to be peaking again, a weakening bond market may not support this borrowing. If so, the S&P 500 index may move lower in price. We still believe that the market has the potential after the corrective phase to rally to new highs by year end.

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