Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

“Investors Have Begun To Reduce Leverage” – BofA Spots “Bearish Signal” In Margin Debt

Courtesy of ZeroHedge View original post here.

Research analysts publish dozens of complex charts that illustrate the bubble of everything continues to inflate away as central banks expand their balance sheets at record paces. These monetary wonks have distorted traditional indicators and made fundamentals obsolete, leading markets into a dangerous melt-up on a post-COVID basis. In our minds, and what we want to convey to readers: simple is better, and that's why we're focusing on margin debt. 

Margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by Financial Industry Regulatory Authority (FINRA) – has soared to record levels since the COVID lows of 2020. It's a simple indicator of stock market leverage. Turning points in markets develop when leverage is unwound, and Bank of America's Stephen Suttmeier has spotted "potentially a bearish peak for margin debt in June 2021." 

"Rising leverage tends to confirm US equity rallies. It is not new record highs for margin debt that we worry about. We get concerned when margin debt stops rising to suggest that investors have begun to reduce leverage," Suttmeier said. 

FINRA reported that July was the first decline in margin debt since the bottom of the equity market in March 2020. FINRA margin debt plummeted to $844 billion (down 4.3%) from a record high of $882 billion in June. Although peaks in margin debt don't always coincide with tops, he points out the decline results in weaker price action for the S&P500. 

A major S&P500 top was put in during the Dot Com and GFC when margin debt violently reversed. There have been three instances of drawdowns in margin debt with corrections then immediate V-shape recoveries in the main equity index post-GFC. In June, margin debt peaked then reversed in July, and Suttmeier is extremely "concerned" about this trend.

The equity analyst identifies 21 margin debt peaks using FINRA and Global Financial Data back to 1929 and determined the S&P500 generally trades weaker after a margin debt peak. 

"The SPX tends to be much weaker and is less likely to trade higher for the 1-month through 24-month periods after a peak in the margin when compared to SPX returns for all periods back to 1928," Suttmeier said 

Another way to look at margin debt is through a 12-month rate, which has produced a "bearish signal" for equities.  

The 12-month z-score also shows margin debt was at an extreme, a little over two standard deviations over the mean. The excessive borrowing was fueled by central bankers creating a low-volatility regime which drove retail into meme stonks. 

The free credit balance available in customer's cash and margin accounts at a broker-dealer fell to a record low in late December. This means investors are leveraged to the teeth. 

During past margin spikes, investors were swept up in the euphoria phase of easy money. Today's over-exuberance is in the "meme stonk" craze and ESG stocks. 

Michael Burry, the famous hedge fund manager who bet against the housing market in 2008, had caused a stir on Twitter not too long ago when he said, "the mother of all crashes" was nearing. 

Burry warned about meme stocks, such as GameStop and AMC Entertainment Holdings, that "We're out of new money available to jump on the bandwagon."

Over the decades, there's always been a tipping point for markets when margin debt reverses and causes equities to waterfall. A correction in stocks could trigger margin unwinds that would result in a crash. 


Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!





You must be logged in to make a comment.
You can sign up for a membership or get a FREE Daily News membership or log in

Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!