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