Margin debt levels are a poor tool for timing the stock market
By Anora M. Gaudiano, MarketWatch
Stock market peaks often coincide with record levels of margin debt, but trying to time the market based on this indicator alone would result in missing out on major rallies, according to analysts at Bespoke Investment Group.
The S&P 500 is trading near record levels around 2,506 after closing at an all-time high at 2,508.24 last week. Meanwhile data from New York Stock Exchange showed that margin debt in August reached $550.9 billion (http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3153&category=8). It was the second straight month of record margin debt and the sixth over the last eight months.
"Record levels of margin debt are often considered a negative signal for equity prices on the assumption that investors are leveraged to the hilt, and everyone that is going to get in the pool is already swimming," the analysts said, in a note.
But margin debt levels, much like valuations, can continue to climb to new records.
Read:Here's why you should never try to time the stock market (http://www.marketwatch.com/story/heres-why-you-should-never-try-to-time-the-stock-market-2017-03-14)
Still, the fact that the last two peaks in the debt margin levels perfectly matched the peaks of the S&P 500 in 2000 and 2007, the recent run-up in margin debt levels can make investors, who are already worried about lofty valuations (http://www.marketwatch.com/story/stocks-at-their-4th-most-expensive-level-ever-are-smack-dab-at-the-heart-of-bubble-territory-2017-09-22), even more nervous.
The problem for would-be market timers is that past margin-debt records often haven't signaled an imminent pullback.