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Why Present High Margin Debt is Worrisome for Stock Market

Although margin debt has declined a bit, this chart from Sentiment Trader indicates that it is still close to all-time highs. That’s despite many warning signs that the stock market is overbought.  Why is this worrisome? Very high margin often precedes major market declines.  It also means a lot of stock is in the hands of weak handed investors who are taking outsized risks that would subject them to market calls and outsized losses when the markets decline.  In fact, high margin accelerates market declines. That’s because leveraged investors are forced to sell stock into down markets to meet margin calls.  Note that margin spiked in March 2000 at the time of the dot.com crash. It also spiked before the financial crisis in 2007.

Why Present High Margin Debt is Worrisome for Stock Market
Why Present High Margin Debt is Worrisome for Stock Market

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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