BofA Merrill Lynch analyst Mary Ann Bartels highlights an interesting trend in a note to clients this morning – margin debt at the New York Stock Exchange is moving up, and that seems to indicate that investors are leveraging up their exposure to the market.
Year-over-year growth in NYSE margin debt just turned positive, and Bartels says that is usually bullish for stocks.
From the note:
Leverage, as measured by NYSE Margin Debt, rose 5.4% year-on-year (YOY) to $286.6bn in August, after nine consecutive months of negative YOY growth since last November. YOY growth turned positive in June 2003 and November 2009 after prolonged negative growth, and the S&P 500 returned 6.1% and 4.9% for the following three months, respectively.
Leverage can be used as a sentiment indicator as it is related to investor confidence. It tends to be correlated to the direction of the equity market – investors are likely to gain confidence and add leverage when the equity market is going up and vice versa. The current reading shows that investors are becoming more confident in the market, which supports further upside.
Here’s a chart from Bartels’ note showing the correlation between the S&P 500 and year-over-year growth in NYSE margin debt:
Photo: BofA Merrill Lynch
The way Bartels describes the change makes it sound like the “Bernanke put” may be working.
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