There is a saying that there are 2 major market forces: greed and fear. Margin Debt data illustrates this very well and it could be sending a major signal – just now.
The latest market trend is to lead all those stimulus checks that are supposed to land into stocks. This has been enough to quell inflation fears (at least for now) and propel S&P500 (US500) above 4000 points. One would wonder – with so much cash around, why would anyone still borrow against stockholdings? Well, the answer is simple – to buy even more. Just like with option calls, margin debt allows to get even greater exposure that any cash alone would allow.
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Create account Try a demo Download mobile app Download mobile appIf you study the history of the data in relation to GDP, you might notice that buying stocks on margin really took off in the 90’s. The relationship peaked at around 3% at the top of the dot-com bubble and then similar levels called the tops in 2007/8, 2015 and 2018. Now all this has been smashed and we are approaching 4% and seemingly sky is the limit.
Margin debt to GDP is the highest in history - by a good margin. Source: XTB Research
However, changes could be more important than levels for market dynamics. Here we can see that margin debt to GDP just increased by more than 60% y/y and it happened to increase by at least 59% only 3 times before since 1960 – each time being very close to call market top: 1983 (local high), 2000 (bull market high), 2007 (bull market high).
Each previous rise in margin debt to GDP by around 60% y/y called the market top - will it be the 4th time? Source: XTB Research
Could this be different this time around? Sure it could. The Fed could propel the current bull run beyond anything we’ve ever seen, crushing all the historical parallels. But if you add the fact that this metric was NEVER above 0% when S&P500 saw a bear market low for the past 60 years, it’s at least worth watching.
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