NYSE Margin Debt Says We May Have Seen The Stock Cycle Top

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by kelvinator

I do investment management and here is my personal read on what’s happening with this selloff:

I agree with Dave Fairtex that, so far, the signs that this is ‘the big one’ like junk bond spread blow-outs haven’t shown up just yet.  However, there is one indicator I’ve been tracking for many years now that I think is in the process of signaling at least a major, deeper correction ahead or a major trend change to a bear market – NYSE Margin Debt.  Here’s my write-up on it:

We got the NYSE margin debt figure for September. It came in at $648 billion dollars, down from $652 billion in August. As someone who has been tracking the NYSE margin debt trend for a long time as an indicator that is highly correlated to S&P trend changes over time, that’s significant to me in a couple of ways:

1) NYSE total margin debt declined in a month in which the S&P hit a new, all time high. I looked back at mini-ramps to new highs going back five years and didn’t see instances in which a ramp up to a new high wasn’t accompanied by a multi-billion dollar increase in margin in the same month except in two cases: the peak at the beginning of the multi-month -19.4% correction in 2011 and peak at the beginning of the multi-month ~13% 2015-2016 correction. To me, the margin decline on the S&P Sept. new high probably signals a important underlying change in sentiment to cautious/bearish.

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2) As a result of that decline, September, NYSE margin debt was left only a tiny $1.8 million over the 12 month trailing average I’ve been using as an over/under trend reference. So, margin debt is virtually certain to go under the 12 month average this month (October). The last time that signal was given (over to under 12 month trailing average) was Sept., 2015, just after the multi-month 2015-2016 correction started. The last time it happened before that was at the start of the 2011 correction, and the time before that was the shift to bear market in late in 2007, and the time before that was in Sept. 2000, at the start of the 2000-2002 bear market.

So, my conclusion is that the NYSE margin debt is not indicating with certainty that we’re shifting to a bear market here. IMO, though, it’s telling us that it’s highly likely that, at the very least, we’re seeing the start of a correction that will last many months, rather than a quick resumption to new highs and continued uptrend, and that the selloff will probably go deeper than it has already. NYSE margin trends represent super-charging momentum that either builds debt leverage and raises prices, or momentum unwinding leverage, liquidating stock positions and lowering prices.

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The last two trend changes signaled the corrections starting in 2011 and 2015, in which the central banks had expanded powers to stem a full bear cycle decline and sell-off. To me, though, the infrequency of this signal, (4 times in the last two decades), its 50% correlation with beginnings of bear trends, and the extreme extension of this bull bubble in time and prices strongly raises the odds that Sept 20 was the US stock cycle high, and that we may be seeing a turn to a bear market if we get a couple of months readings under the average, (October and November), as I’m pretty confident we will.

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