One of the indicators I like to watch and post in Trade Signals from time to time is margin debt. Simply put, markets dislocate when leverage unwinds (would be market makers and buyers step aside). I’ve been concerned for some time about the record high level of margin debt but, in general, most of the time, margin is not a bad thing. It is when it declines below its moving average trend line (“smoothing”) that our concern should grow.
The following chart looks at Margin Debt as a Percentage of GDP and is updated quarterly. It then looks at the current level and compares it to a 15-month smoothing. Risk is elevated when the current reading is below its smoothing. Note the red arrows and the line I drew between them (1987, 2000, 2008 and today). The yellow circle highlights the most recent reading.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.