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Is Weak Margin Debt Signaling a Market Crash?

Tuesday, October 11, 2016 6:17
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Bear marketIn what one analyst has called a “bone chilling” indicator for stocks, total NYSE margin debt has fallen 7% from its all-time highs set back in April of 2015.

The crash may actually be long overdue, says analyst Wolf Richter. On his Wolf Street investment blog, Richter noted that margin debt “has a bone-chilling habit of peaking right around the time stocks crash.” Considering that debt level peaked some 18 months ago, the markets could well be prepping for a big pullback at any time.

However, some would argue that we’ve already seen a bear market in between then and now. The Dow Jones Industrial average plunged from its May 2015 peak around $18,272 to $15,973 in January of this year — a 12.5% cyclical drop. It’s since recovered to hit fresh all-time highs over the summer.

Many analysts remain skeptical of the markets’ resilience. Venerable market mind Dennis Gartman, who publishes the daily Gartmen Report, wrote recently of the margin debt issue that “This will not continue; it can’t.” Analyst Doug Short agrees, noting that margin debt “is well off its record close in April of last year and showing a pattern similar to what we saw following the market peaks in 2000 and 2008. This has been an interesting indicator to watch in recent months and will certainly continue to bear close watching in the months ahead.”

Still other analysts are bearish for other reasons. Bank of America recently warned of peaks in multiple asset classes, while “bond king” Bill Gross blames the Fed for an upcoming crash.

No single indicator in stock market history has proven to be a reliable predictor of price movements, so investors should probably take the margin debt decline with a grain of salt. But when some of the best minds in the industry stand up and take note, it’s probably wise for investors to at least consider all possible outcomes.


The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) fell $0.34 (-0.19%) to $182.78 per share in premarket trading Tuesday. Year-to-date, the only ETF that tracks the DJIA has risen 5.25%.

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