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As we all know, Alice's wildly varying sizes caused her a great deal of trouble in Wonderland – especially when, no bigger than a playing card herself, she ran afoul of the murderous Queen of Hearts.
Then she began to grow. And suddenly, the tiny queen shouting "Off with her head!" looked much less frightening.
In other words, size is important – but perspective is more important – particularly in the markets right now.
That's especially true for one "frightening" indicator: margin debt.
Margin debt is just money that is borrowed to buy stocks. Most retail accounts can borrow 100% of their account balance to buy additional stock at fairly low interest rates.
Analysts use margin debt as one measure of market participants' risk appetite, and I've read some articles worrying about the fact that margin debt is at all-time absolute highs.
But that's not the whole picture.
The good news is that while margin debt is "big," there's a positive indicator that's even "bigger"…
Margin Debt Is at All-Time Highs – but So Is the Market…
With ongoing talk about the aging bull market, I think it's important that we continue to look objectively at potential signals that the market could get overextended to the upside.
I look at thousands of charts per week. So when a graphic hits my screen that I think is particularly useful, I like to pass it on. Here is a series of three charts that give an interesting picture on margin debt in use in the U.S. stock market.
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Ed Yardini of his own eponymous research firm puts out consistently interesting looks at various aspects of the market. Recently he looked at this very issue of margin debt, which many people would use as a proxy for the amount of leverage (and therefore additional risk) that traders and investors are taking on.
Here's the first chart:
As we can see, margin debt is higher in absolute terms than it was at the 2000 and 2007 market tops. But the total amount of money represented by stocks has been growing even faster, as we see in this chart:
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.