Earlier this month I wrote an article detailing the rise in margin debt on the NYSE. The rise in this case is particularly noteworthy because it occurred during a market correction when normal market selling would reduce margin debt levels. This would suggest that buyers were increasing margin to increase equity holdings during the correction in anticipation of a continuation of the current bull market.
However, as I discuss in the Fox Business interveiw below, it is not just the nominal level of margin debt that is important but rather the rate of expansion. I showed this with two charts recently in “A Technical Look At Margin Debt.”  As I stated:
“What both of these charts do suggest is that the current momentum of expansion in margin debt has reached historically important levels. It is likely that the markets will experience a correction at some point in the near future. What the data doesn’t tell us is whether it will be a “buy the dip” opportunity or something much more significant. However, given the length of current economic expansion and cyclical bull market, the fact that the Fed is extracting liquidity from the markets, and the current extension of the markets above their long term moving averages, there is cause for real concern.
The current levels of margin debt are indicative of an extremely optimistic view of the market. What is important to remember is that margin debt “fuels” major market reversions as “margin calls” lead to increased selling pressure to meet required settlements. Unfortunately, since margin debt is a function of portfolio collateral, when the collateral is reduced it requires more forced selling to meet margin requirements. If the market declines further the problem becomes quickly exacerbated. This is one of the main reasons why the market reversions in 2001 and 2008 were so steep. The danger of high levels of margin debt, as we have currently, is that the right catalyst could ignite a selling panic.
The issue is not whether margin debt will matter, just “when.” Unfortunately, for many unwitting investors, when that time comes margin debt will matter “a lot.”
