Back in March, bond guru Jeffrey Gundlach was warning that margin debt, which reflects the dollar volume of securities investors have purchased through borrowed money, was in “the scary zone.” At the time, NYSE margin debt surged to $465 billion.
After dipping for a few month, margin debt is back on the rise. As of June, NYSE margin debt is just short of those all-time highs.
For longtime market observer Dennis Gartman, this means the stock market is ripe for a correction.
…since ’09 margin debt has risen from $US200 billion to nearly $US475 billion as of two months ago and historically margin debt actually begins to weaken from its highest levels before stock prices begin to turn downward. If the highs were made a few months ago in margin debt, the market is more vulnerable now than it was, if history is prologue to the future. Although past performance by mutual and hedge fund managers is not, according to the SEC, indicative of future performance, when it comes to margin debt the past truly is a guide to the future.
Doug Short, who published the data to which Gartman refers, is a bit more sanguine. He notes that the data are already several weeks old when published, so we can’t say for sure whether we’re seeing a major shift in margin debt.
Some also believe margin debt levels are a more benign coincident indicator whose recent movements are merely reflecting the increasing presence of hedge funds.
For his part, Gundlach said it may actually be difficult to tell whether the surge is a cause or effect of the broader market rally.
But it’s clearly something investors are watching closely.