Margin in the Market: The Trend

[Aman A.K.A. Ahamburger]

One thing I have been watching very closely is the amount of margin debt that is in market. I found a well balanced article that goes into further detail on the subject. It can be found here.

Since the article does a great job outlining the potential, I will just post a couple charts from it. Please note that neither myself or the author is saying we are heading for a major market meltdown, it's simply a perspective that I would like to share.

[Aman A.K.A. Ahamburger]

If you look very closely at the bottom graph you will notice the uncanny correlation between margin debt and the gyrations in the market since the 1980's. The current buildup is obviously by far the biggest amount of debt that there has ever been in the market. The big difference is that in the past, enthusiasm has been one of the driving forces to propel it, not so this time.

When you look at the top graph you can clearly see that the last two times margin debt was this high was in 2000, and 2007. I don't have to go into detail what happened the last two times, but I will point out that it is very clear that retail investors have not learned any lessons over the past 14 years.

In 2000 it was technology that pricked the bubble, in 2007 it was housing that pricked the bubble. So the question is; does painfully slow global economic growth(look at the EU numbers from June 4th), the Chinese property bubble, and a building global conflict prick this third MASSIVE debt bubble? Does the market go nowhere until it catches up(deviates from a 40 year trend)? Or does the retail investor keep piling debt on?

In any event, as some of us have been saying for years now, KASH is king. Honesty, with the current state of affairs in the global economy, I couldn't be happier than I am now being in a holding pattern, building up a cash position.

[Virgil Showlion]

Are you predicting a... market correction, Ham?

And here I thought I'd see Paul predicting a landslide Hillary Clinton victory in 2016 before I ever saw the day.

[Aman A.K.A. Ahamburger]

Hahaha.. I've been trying to say for years that if I see something, I'll say something. It's not my fault that neither side likes what I have to say.

As far as I'm concerned there is a major finicial "situation" dead a head. The fist big problem is that retail investors have taken on record amounts of debt just to try and make up for gains they missed, and for selling out on the way down the last two times debt in the market was this high.

How anyone can look at China and say, yeah, they will work it out, is beyond me. Anyone that knows anything about real estate should understand how FUBAR it is there. I mean hey, only all the biggest Chinese moguls have left the building that's never a bad sign, never.. Hahaha. Not to mention the increasing tensions in the Asia Pacific regions.

Then there is the war in the mid east which is spreading and getting worse, but it's ignored because its been going on for so long that people have been desensitized.

Oh and let's not forget about Europe. Aside from rising nationalism and Putin taking control of parts of the Ukraine (which he can't afford) there is deflation. Yep it's true, regardless of the trillions spent on the ESM and other magic funding devices, the ECB has to pump billions into the banks and cut rates into negative territory to try and pull the EU out of a true depression. For all the talk I heard around here for years about how the US was in a depression, the fact the EU is in an actual depression has just flow right over head like a black swan. Plus, there is the whole 2-3 trillion dollar bad bank thing...

In short, I was saying in 2011 to watch out for 2013. In 2013 I laid out bearish trends that could and did appear(missing how bad Putin was going to screw things up), and now those trends have turned into major issues that most seem to be ignoring, why? The market was up 30% last year and now everyone is on hopium that we will see the market continue to move up in the face of major global socioeconomic issues. This is what I call greed and is usually the end of every economic cycle.

Nope, I certainly don't mind sitting and waiting to see how this all works out Virg.

[Aman A.K.A. Ahamburger]

I would say this is the question of the hour, Is the Market Confident or Too Complacent?. And Mohamad is only focusing on the VIX.

[Aman A.K.A. Ahamburger]

First, damn, I see you liked the first post, however, you were asking on wxyz's thread where I got the idea from; like I stole it from the slander or something. In fact, I outlined in this thread where I'm coming from and I can assure you it has zero to do with the thoughts of any past or present posters, for that matter, anywhere on the internet.

On topic now, the charts that are linked in the first post are even better than I thought because they continue to be updated. As one can clearly see margin debt held about the same in May from April. I have posted the BIS article about market exuberance a couple of times now so there is no need to again. However, I will post the Schiller S&P chart just to reaffirm what the BIS, and myself are looking at. The Schiller chart clearly shows the market can go higher yet, it also shows some interesting trends dating back to the late 1800's.

Nothing like those long term trends.

[damnotagain]

damnotagain
Familiar Member




Joined: Oct 19, 2012
Posts: 803

Reply #6 posted Mar 30, 2014 at 5:34pm QuotePost by damnotagain on Mar 30, 2014 at 5:34pm

Margin debt currently stands at 2.5% GDP . Last time it was at these levels we had the crash of 2000 (2.7% GDP ) , 2007 (2.6% GDP ). One asset bubble after another.
Just a thought .....

 If your trying to say you didn't get the idea for this thread from me seems a  little more than coincidental . Magically this thread appears an hour after I posted my reply to Mr L on his "money supply is up not down m3 broke 17 trillion thread. "


Be good and you will be lonesome!

M . Twain

[Aman A.K.A. Ahamburger]

Are you sure you didn't get the idea from me? I had mentioned it a couple times before this as well... Again, I have been watching this for a while!

Jan 30, 2014 21:36:30 GMT -5 Aman A.K.A. Ahamburger said:

I'm not 100% sure why the pundits are saying it will be raised to check inflation, but I'm guessing it's because inflation will make things cost more. It would also be why rates are never constant?

I agree that monetary blunders cause every boom and bust. As they say, it takes two to tango.

[damnotagain]

I can see that you did. No I did not see that post dated in January. Not afraid to say your right .  My apologies .

[Aman A.K.A. Ahamburger]

Not a problem, damn. Honestly, if you would quit coming at us from the point of view that you need to try and vindicate you know who, you would find that you share a lot of the same thoughts as the "pack" that is left here.

The difference between me and most "bears", is that I think people are free to make their own choices. I don't sit here and act like I have the right to judged and call everyone names because of what they believe. I also don't think it's the end of the world or the end of our society, however, I was dead wrong that humans didn't need a huge wake up call(a spanking so to speak).

Am I stunned right now and scratching my head at what everyone is looking at? Yep. But that's okay, it was the same thing from '09-'12. The way I look at is, "don't say I didn't warn ya." Just like the turn around from '09-'11; I tried sharing why, and all that happened was I was attacked/ignored by the majority.

The thing with market downturns, and you can clearly see this from the Schiller chart above, they happen all at once. It's not like run ups that build slowly over time. What happens is, and I've seen this twice already in my lifetime(2000,2007) all these really bad things keep building up in the background; then all of a sudden, PANIC!

The bottom line is that all of the "bad" trends that I have been outlining for the past 18 months have come to fruition, just like all the "good" trends did from '09-'11. At this point I keep adding to my S&P account every month because I believe in long term investing. However, I would like to buy a house for my family to live in when prices come back to reality, so I would rather just save my money than risk it and play with fire.

[Aman A.K.A. Ahamburger]

An interesting perspective on margin..

Cashin: An 'ultra high' level of leverage out there

Big moves in a handful of stocks provided traders with a worrying signal—an "ultra-high" level of leverage in the stock market, veteran trader Art Cashin told CNBC on Wednesday. The trend could mean more volatility going forward, he added.

Cashin said he saw a dozen stocks make 7 to 8 percent moves on Tuesday without any specific headlines to justify those swings. That left traders curious, and Cashin said they settled on high levels of leverage as a culprit behind the moves.

"People must be three or four times normal leverage," Cashin said. "We've seen margin accounts go up. We knew the hedge funds were playing. But to see extreme moves like that on nonspecific news tells me there's a lot of leverage out there. ... If we start to get a protracted move, it could get very volatile."

[Aman A.K.A. Ahamburger]

As you can see from the chart in the first post, as well as the new market highs, margin debt started its move back up.

Stock trader who called three crashes sees 20% collapse

The primary indicator that Cook uses is the “Cook Cumulative Tick,” a proprietary measure he created in 1986 that uses the NYSE Tick in conjunction with stock prices. His indicator alerted him to the 1987, 2000, and 2007 crashes. The indicator also helped to identify the beginning of a bull market in the first quarter of April 2009, when the CCT unexpectedly went up, turning Cook into a bull.

What does Cook see now?

“There have been only two instances when the NYSE Tick and stock prices diverged radically, and that was in the first quarter of 2000 and the third quarter of 2007. The third time was April of 2014,” Cook says.

In simple terms, as stock prices have gone higher, the NYSE Tick has moved lower. This divergence is an extremely negative signal, which is why Cook believes the market is losing energy.

In fact, the Tick is showing a bear market, which seems impossible considering how high the market is rising.

“The Tick readings I am seeing (-1100 and -1200) is like an accelerator on the floor that is pressed for an indefinite amount of time,” Cook says. “Eventually the motor will run out of gas. Now, anything that comes out of left field will create a strain on the market.” Since the CCT is a leading indicator, prices have to catch up with the negative Tick readings.

“Think of a dam that has small cracks that are imperceptible to the eye,” he says. “Finally, the dam gives way. Eventually, prices will go south, and the Tick numbers will be horrific.”

[Aman A.K.A. Ahamburger]

The big reason the market unwound... Leveraged Money Spurs Selloff as Record Treasuries Trade. Again, the charts in the OP tell the story.

[Aman A.K.A. Ahamburger]

The article below is about a month old, but the story is still very relevant.

Traders Are Borrowing Tons Of Money To Buy Stocks

[Aman A.K.A. Ahamburger]

Over the past year...

Margin debt is heading lower, suggesting bearishness is setting in

The NYSE reported that total margin debt for January stood at $445 billion, an undeniably big number. But it’s been falling steadily over the past year, from a peak of $466 billion in February 2014. The latest total is now below its average level in the trailing 12 months.

To put this in context, consider that when the bull market began in March 2009 and the Dow Jones Industrial Average DJIA, -1.01% was below 6,600, total margin debt was only $182 billion. As the Dow nearly tripled over the next six years, margin debt also rose steadily — until recently.

Margin debt’s downtrend is bearish, according to research conducted by Norman Fosback, the former president of the Institute for Econometric Research and current editor of Fosback’s Fund Forecaster. “If the current level of margin debt is above the 12-month average, the series is deemed to be in an uptrend, margin traders are buying, and stock prices should continue upwards,” Fosback wrote in his investment textbook “Stock Market Logic.”

“By the same line of reasoning, sell signals are rendered when the current monthly reading is below the 12-month average. This is evidence of stock liquidation by margin traders, a phenomenon which usually spurs prices downward.”

How good a track record does this margin debt indicator have? It’s not perfect, by any means. But its overall record is statistically quite significant. Notice from the accompanying chart that the very close correlation between major bear markets and periods when margin debt is below its 12-month moving average (as denoted on the graph by a ratio reading below 1).

For example, margin debt fell below its 12-month moving average in December 2007, only three months into the 2007-2009 bear market and well before the most punishing months of that bear market. It took a bit longer for this indicator to turn bearish after the Internet bubble burst in March 2000 — six months rather than three — but followers still sidestepped the bulk of the bear market that began then.

The accompanying table reports the indicator’s track record since 1959, which is how far back the NYSE data extend. To calculate the odds of being in a major bull market, I relied on the bull market calendar maintained by Ned Davis Research. Notice that, over the past six decades, the odds of being in a major bull market were better than four-out-five when margin debt was above its 12-month moving average.

.... then add in big money on the sidelines and the fact the world is speeding towards a major conflict mixed with China's RE bubble... Stay

[Aman A.K.A. Ahamburger]

Woo-hoo! Bucking the trend, margin debt in the market has hit a new high! Mix that with record amounts of margin debt in the Chinese markets - the biggest real estate bubble in history - and the picture below is worth a lot more than a thousand words.

[tyfighter3]

There is a reason why Cash is KING.

[Aman A.K.A. Ahamburger]

Yeah man. The chart reminds me of a merry go round..

[Aman A.K.A. Ahamburger]

It's no secret that I started to become bearish on fundamentals in 2013. What I have learned since then is the hardest thing about being a balanced contrarian is the middle point, or beartrap as it were. Staying invested in dividend paying stocks is a great way to offset this problem, with the added bonus of cash on hand. A few interesting articles caught my attention this past week, and they tie in nicly with this trend; which has only gotten worse:





As can be clearly seen in the second chart, up until 2013, corporate earnings fully supported the run up in the market. We know that since then corporate buy backs have been a big part of the reason prices pushed higher. However, for all talk we heard in the initial run up from 2009 about central bank buying, as the Bank of America has outlined in two different graphs, it's been since 2013 that central Banks have been putting a back stop in - along with buybacks - and this has essentially killed volatility since 2014; which is precisely why algorithmic hedge funds have been getting killed since 2014(low volume).





Stay

[Aman A.K.A. Ahamburger]

Jan 20, 2018 11:26:32 GMT -5 Aman A.K.A. Ahamburger said:

A great article was recently published in the FT. It outlines how China has been in a recession since 2014. Which lines up with the data presented in this the Asian Crisis thread. So, while China was able to stave off their day of reckoning in 2015 when their property bubble bursts by faking data to instill fake confidence from the world markets; they did so by making their debt completely reliant on the success of the One Belt road. Which has hit a wall of war. So, AKA China sacks Russia because Putin screwed them worse than anyone, and all this talk about Russia-China cooperation is more like; "welcome to my liar said the spider to the fly."

-China Vows to Toughen Rules on $38 Trillion Banking Industry
-China Is Heaping Debt on Its Least Productive Companies
-China's Dalian Wanda Group says 2017 revenue down 10.8 percent
-China's Wanda sells interests in high-profile London property project
-Turkey warplanes bomb Kurds in Syria
-Syria: Turkey war planes launch strikes on Afrin

Jan 12, 2018 14:39:23 GMT -5 Aman A.K.A. Ahamburger said:

With the announcement of Fiat Chrysler to Invest $1 Billion, Pay Bonuses on U.S. Tax Cut; we now have hundreds of thousands of workers across all sectors of the economy receiving extra money. Add to that: China cutting tariffs, big deals being made like the Foxxcon plant in Wisconsin, aid cut to Pakistan & The U.N.....

Now, if only 50% of S&P/DOW companies earnings didn't come from overseas; fundamentals could catch up to stock prices we would really be firing on all cylinders into Global Free Enterprise.(Which is precisely what I thought would happen when the Free Enterprise thread was created back in 2011) Ah well, the economy (earnings) and the market have been disjointed for a few years now, what's another 7 or 8 when the end result will be the start of the biggest long term bull run in human history? Thanks JC.