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Two weeks ago, Barron's cover showed a gleeful bull on a pogo stick with the caption, Dow 16,000! For the past 20 years, Barron's has run their semi-annual Big Money Poll of professional investors. Currently, 74% describe themselves as either bullish or very bullish on the prospect for US stocks –a new record high for the Big Money Poll! That is survey data –you can say anything you like, but what does your behavior show? Last month we looked at bullishness from a hard data perspective. Surveys aside, if you really believe the market is going lower, you've probably been a seller. If you believe it's going higher, you're a buyer.
On a list of potential reasons that the market could only go higher, one was certainly the prevailing view that the Fed, the BoJ, the ECB (and all other central banks), stood ready with as much stimulus as was needed to prevent future problems. Good economic data was good, but bad data was, well, even better. To borrow a bit from 1984 by George Orwell, it's the Big Brother trade - we're victorious over our earlier, bearish beliefs; we now love Big Brother (it's been a few years, but it was a novel about the FOMC, wasn't it)?
A week and a half back, the NYSE reported the aggregate margin debt level of their member organizations for March. It was a pretty good uptick from February as we collectively went an additional $13.4 billion more on margin. This chart updates the one from last month and shows Margin debt plotted against the S&P 500 since the start of 1999. Margin debt levels are from the end of March (the NYSE reports with a lag). The S&P data is a weekly moving average on the last day of the month and is current through the end of April.
- A strong correlation between movement of the two plots.
- Market peaks occur in conjunction with a parabolic move higher in margin debt levels.
- The absolute level of margin debt isn't as important as a downturn subsequent to a peak.
No matter how much we might love Big Brother, there comes a time when the market moves against us. If that happens while we're collectively at extreme levels of margin debt, the pressure to sell is more intense that it otherwise would be. It's OK to be wrong –you can always change your mind. It's never OK to be wrong and highly margined! Watch for when that margin debt plot turns lower.
© Bill Hardison