by jessefelder
The latest margin debt figures were released last week and they show leveraged investors continue to delever. In fact, margin debt is now falling at an annual rate of 15%, a level of derisking that has always been accompanied by a minimum 20% decline in the S&P 500 over the past half century.
This makes this latest episode of derisking fairly unique. There have only been a couple of other precedents in which stocks rose or were flat year-over-year while margin debt fell at at least a 15% rate: May of 1969 (margin debt down 15%/stocks up 10%) and June of 1973 (margin debt down 18%/stocks flat). January of 2001 (margin debt down 20%/stocks down 1%) also comes very close.
In all three cases, the significant derisking on the part of leveraged investors was a good warning sign a bear market was already underway. And if the current derisking proves to be another sign of a nascent bear market, there is a record amount of potential supply for the stock market to absorb this time.
