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Stock Market Margin Debt is Decreasing But Not Enough to Assure Stocks Won’t Keep Declining

By:

The Founder & Portfolio Manager Of Active Alts, Principal & Co-Manager Of The Advisorshares Ranger Equity Bear ETF

The good news is margin debt is declining.  The bad news is that it still Is much too high to assure a strong bull market, and that stocks won’t decline a lot more. You’ll note in the charts below that positive balances in 2003 and 2008 preceded strong increases in the S&P 500. Why is high margin debt so worrisome? That’s because when stocks with margin positions decline, margin departments at major brokerage firms sell their customers’ stocks  when the  customers can’t come up with more money to maintain required cash levels.

Simply put, margin calls exacerbate stock declines.   You’ll note in the charts that high margin debt, or negative balances, tend to precede major corrections, and they can be considered contrarian indicators.  That’s because many investors have been deluded by big stock market gains and have thrown caution and rational thinking to the winds.

Investor credit and the market 1995 -2020
debt has dropped 25% from the peak 1960- 2020

Originally Posted on April 29, 2020 – Stock Market Margin Debt is Decreasing But Not Enough to Assure Stocks Won’t Keep Declining

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Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.

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