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Margin Debt Surges In December

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    January 29, 2014

    In the month of December margin debt on the NYSE surged by over $20 Billion dollars hitting a new all-time high of $444.931 billion.  The rise in leverage also sent investors net worth to a negative $149.358 billion which is also a record.  This is shown in the chart below.

    Margin-netcreditbalance-012714

    It is important to note that it is not the rise in margin debt that is the problem for the markets – it is the fall. When the ultimate reversal begins, and investors are forced to liquidate to meet margin calls, the market begins to feed upon itself.  This forced liquidation quickly accelerates downside reversions in equity markets leaving investors little opportunity to react.  The last two peaks in margin debts have had nasty outcomes for this very reason.

    Margin-balance-vs-SP500-012714

    Lastly, spikes in margin date on an annualized basis (brought to my attention by my colleague Eric Hull) has typically marked either short term peaks are larger market corrections.  This chart below is a log chart of the S&P 500.  While this makes the chart easier to read it also smooths some of the more relevant market reversion like Long Term Capital Management or the Asian Contagion in the late 90’s.

    Margin-Debt-SP500-012714

    The surge in margin debt, along with the current levels of leverage overall, are certainly worth noting.  However, what we need to be vigilantly aware of is when the levels of margin debt begin a reversal.  Despite many claims to contrary – this will likely not end without a good deal of investor pain.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.

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