Stop Letting People Scare You About "Margin Debt"

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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:

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In a phrase, this chart shows us that the use of margin debt went up even faster than the market climbed in the periods leading up to the 2000 and 2007 tops, but has merely kept pace with the market during the current bull run.

To put a finer point on that notion, this last chart shows the year-over-year percent change for margin debt:

We can see that the enthusiastic use of margin was greatest leading up to the Internet Bubble in 2000, significant but not quite as big leading up to the Real Estate/Debt Bubble in 2007, and has been very muted over the last several years of the ongoing bull market.

The margin debt bottom line for me? This rise in margin debt actually looks like pretty darn healthy expansion during a time of market growth. It you're looking for bubble signals, this isn't a prime candidate at its current levels.

As I mentioned yesterday, another one of the risk indicators that I look at - the G/S (gold price divided by silver price) ratio - is sitting at 85, the highest it's been since the 2008 crisis. When this ratio is high, the markets don't think there's as much risk.

Eventually we'll see the G/S ratio revert towards the mean, and that will be a yellow flag for the markets - but for now, we can expect to see this good old bull hang on for a while longer.

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The post Stop Letting People Scare You About "Margin Debt" appeared first on 10 Minute Millionaire.

About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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