What are the NYSE Margin Debt & VIX telling you


Dear PGM Capital blog readers.

In this weekend’s blog edition, we want to discuss with you whether or not the following data are signalling a coming crash of the USA stock-markets:

  • Margin Debt at all Time High
  • VIX at a 7-year low
  • The CNN Fear & Greed index, currently at Extreme Greed

USA stocks have advanced significantly over the last nine months associated with increases in Margin  Debt. However borrowing to buy equities or USA stocks could have reached a turning point, raising concerns that equity prices may have plateaued or could even decline.

The margin debt at the New York Stock Exchange rose to an all-time high of about US$ 465.72 billion in February of this year. The highest margin debt, prior to this one, was US$ 381 billion which was recorded in July of 2007, right before the financial crises.

The increase in NYSE margin debt came as the SPDR S&P 500 ETF’s (SPY) adjusted monthly closing value also hit an all-time high of US$185.47 during the same period.

NYSE margin debt is the aggregated dollar value of issues bought on margin (i.e. borrowed money) across the exchange. Many equity-market participants consider it a gauge of speculation in the stock market. The U.S. Federal Reserve currently has the initial margin requirement set at 50 percent.

As can be seen from below chart, there is a strong positive correlation between NYSE margin debt and SPY.

The CBOE volatility index, or VIX (VIX), measures investors’ expectations for market volatility in the near term.

The VIX is often called the fear index. When it is high investor sentiment is toward increased volatility and corresponding higher risk.

A lower number indicates investors are less concerned (fearful) about the market and anticipate low volatility.

As can be seen from below chart, on Friday June 8th, it dipped below 11 for the first time since February 2007. 

We all remember 2007. The S&P 500 was hovering around the 1,400 level in February and then rallied up to 1,576 in October, for its value to be cut in half in the next 17 months.

The VIX jumped to 37.50 in August 2007 to peak at 89.53 in October 2008.

This is an index developed and used by CNNMoney to measure the primary emotions that drive investors: fear and greed. The Fear and Greed Index is based on seven indicators:

  1. Stock Price Momentum – as measured by the S&P 500 versus its 125-day moving average
  2. Stock Price Strength – based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE
  3. Stock Price Breadth – as measured by trading volumes in rising stocks against declining stocks.
  4. Put and Call Options – based on the Put/Call ratio
  5. Junk Bond Demand – as measured by the spread between yields on investment grade bonds and junk bonds
  6. Market Volatility – as measured by the CBOE Volatility Index or VIX
  7. Safe Haven Demand – based on the difference in returns for stocks versus Treasuries

As can be seen from below chart, on Friday, June 13, this indicator shows extreme greed in the markets:

Fear & Greed Index

There is a rare complacency in the markets. At this very moment, volatility is near all-time lows, optimism is at record highs, and mainstream forecasters are once-again calling for ever-climbing prices — just like they were in 1999 and 2007.

Margin Debt indicates that investors are leveraging their stock market bets, which is what happened in 2007. Leverage can be used as a sentiment indicator because it is correlated to investor confidence. A decline in Margin Debt may therefore signal bearish sentiment in the equity market, regardless of the fact that equities are at a record high.

Looking at the NYSE’s Margin Debt chart with the S&P500 index, Margin Debt posted its second monthly decline in more than nine months. The figures are a few weeks old, but last time the NYSE’s Margin Debt ended a bull period there was a significant correction in the equity markets.

  • Back in 1987, when the Margin Debt hit a record high, S&P500 corrected by a 30% decline.
  • In 1998, S&P500 slipped by 15.5%.
  • Between 2000 and 2002 S&P500 lost more than 46%.
  • In the bear market and great recession of 2007 and 2009 the S&P500 crashed more than 52%.
  • ronco-margin-2

Due to this most investors are asking themselves;

Is the VIX at its lowest level since 2007, combined with the NYSE margin debt at all times signalling a coming Crash of the US Markets?

Last but not least maybe this quote of Warren Buffett is applicable:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Until next week,

Suriname Times foto

Eric Panneflek

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