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Wednesday, January 2, 2013

Margin debt

I just checked the margin debt for Nov. and it was up significantly.  It was up $9 billion from Oct. to almost $327 billion now.  Here is an SPX chart marked up with the months where the margin debt crossed the $300 billion threshold.

There have only been two other occurrences of a value this high.  The red arrows mark monthly closes below the low of the month that margin debt crossed $300 billion.  Each instance had a high volume crash as the margin calls came in.  After the crash we can see that the monthly low (marked by the blue trend line) was resistance when first tested.  In the 2007 instance, that test failed and an even bigger crash happened.  Last year that price was tested in three different months, but gave way in month four.  The rally was back on.   
We crossed in Sept. this time and the low that month was 1396.  In both prior occurrences the market tested that monthly low twice and bounced.  It was the third time that caused the crash.  We just had the first test last month.  SPX got down to 1396 Monday morning and bounced.  Is this the second test bounce?  Will it bounce again if we break it or not?

There are a couple of differences this time.  The monthly bar was not blue so price was not outside the upper Bollinger band.  That means the market was not moving up as strongly this time.  The other difference is that SPX closed above the high of the crossover month within two months.  It has now been three months since the cross and we have yet to trade above that monthly high, much less close there.  All those margin buyers have not seen any payoff even on paper yet.  They have continued to buy on margin though.  With the strongly positive sentiment we are seeing, the number could be even higher for Dec.  However, they won't post it until late the next month.

The super high NAAIM number I posted about (NAAIM sentiment survey ) and the high margin debt indicate market participants are very heavily long.  Another margin unwind event could happen somewhere  below that 1396 level.  My guess is a break of the Nov. low (1343) could kick it off.  Such a crash would likely ensure we have a recession if we are not already in one.  The market might not be as quick to recover as it was last time.


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