Margin debt has fallen more than 30% from its October ’21 peak. That is a similar range to the 2020 contraction, during the pandemic, but far behind the +50% contractions seen during the Dotcom crash (2000-2002) and the global financial crisis (2007-2009).
The S&P fell 49% during the Dotcom crash and 57% during the GFC. The low point in June showed a 24% fall, from the January peak, followed by a 7.5% rally.
Conclusion
Plunging margin debt confirms a bear market, in line with the Fed’s plan to force deleveraging in order to shrink aggregate demand and curb inflation.
The current rally on the S&P 500 is typical of a reflexive rally in the middle of a bear market. We expect further contraction in margin debt as interest rates rise and liquidity tightens. Our target is a 50% contraction in margin debt, with a similar fall in the S&P 500, to 2400.
Acknowledgements
- Hat tip to Advisor Perspectives for the margin debt chart
- FINRA for the margin debt data
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.