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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.

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 Declining
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 Declining

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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