In the beginning of the month, we had noted that Short Selling Had Surged to a Record.
Now, we may be seeing the opposite side of that play: Margin debt is slipping on the NYSE.
Traditionally, moderate amounts of margin help drive stock prices higher, as traders are willing to borrow to buy. As this cuts back, it reflects a subtle change in investor psychology.
A quick WSJ excerpt:
"Margin debt at New York Stock Exchange member companies, as tracked by the exchange, fell about 2.6% from the end of the first quarter through May, the most recent month for which figures are available. Although margin debt rose in April, those gains were more than offset in May as the stock market fell.
The Big Board’s data show that debit balances in margin accounts of customers of NYSE-member securities firms fell to $230.54 billion in May from $236.67 billion in March. June numbers will be available later this month.
Margin debt peaked at $278.53 billion in March 2000, as the Nasdaq Composite Index was reaching its record. Market analysts track margin-debt activity as an indication of investors’ appetite for speculative trading."
Note that we are quite a bit away from the massive margin borrowing top of 2000. This will be interesting to watch.
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Source:
Margin-Debt Use Falls Amid Volatile Market
GASTON F. CERON
WSJ, July 5, 2006; Page C11
http://online.wsj.com/article/SB115206364529698048.html
so, as a contrarian indicator, isn’t this then bullish?
It must be at least slightly bullish, since it means there are fewer people who might be subject to margin calls and forced liquidation. But if it indicates that people are abandoning the stock market, it is a bearish indicator. I think that % margin debt might be a more useful indicator. If people are selling and then withdrawing money from their stock account, it means they have no intentions of reinvesting. If they are selling and leaving the money there, it means they intend to buy again. Is there any way to get brokerage account cash-flow information?
Regardless of people’s attitudes towards the market, isn’t it natural that they would borrow less as rates have gone up?
I would think this change is a function of higher interest rates in comparison to rates of return. Cheap money is going away and with it comes a higher risk on margin trades. Which as demonstrated by the number above, people are less willing to stomach. Thus, reducing their margin load.
Margin calls in June and people moving to bonds will do that. It won’t be long before Bob Pisani is telling us that all that cash on the sidelines is bullish. I remember hearing that every day in 2000.
That is one of the biggest reasons i keep coming back here…..Comments that include the phrase “I remember…”
FED watchers are sheep. They all parrot (sorry about the crossed animal metaphor) that lower rates are good for the market and vise versa.
I remember all the lemmings saying, “You can’t fight the FED” five and six years ago. Yeah, right. All the while the FED was dropping the target the markets fell, too. And since the 2003-2004 bottoms, as rates rose so did equities.
Listen up peeps. The FED’s tools have become so impotent that money pricing is only following the market. Its all about the liquidity now, nothing else. As credit contracts, all markets will continue to correct.
The top was January 2000. We’ve been in a bear market since and I recommend sitting close to the exit with T-bills, cash, gold and near the money puts.