Latest margin debt figures
and a look at the yield curve
Increasing use of margin debt can be a big driver of the stock market. Margin debt is incurred when investors borrow against their current holdings to buy more stock. It can be the fuel for a big bull run. However, it is a two-edged sword. Operating on margin is also a quick way to get wiped out. I think it is very important to watch the margin debt figures. It shows how confident investors are in the current market. When margin debt stops flowing, this can be a problem for the stock market.
After a big decline in margin debt use for the first half of the year, it has now gone flat. I believe investors are still trying to gauge the market.
In addition to the margin debt statistics, free credit balances (cash on the sidelines) is declining.
Nearly $6B has been drained from the free credit balances of investors on a month-over-month basis. This was money that was available to buy stocks but has gone elsewhere. July saw over $17B get pulled out. It is obvious that investors are worried about the stock market and are putting their money to use buying something else.
Looking at the bond market for clues. We see that the 10-2 year treasury is still inverted.
My preferred pairing is the 30-year minus the 3-month. It continues to stay positive but it is slowly slipping lower.
According to the FRED website, the spread is down to 19 basis points as of yesterday.
Putting 2 and 2 together, it does not look good for the stock market here. Bond investors are worried about the market and are moving into shorter duration bonds. Margin debt has stayed flat and investors are pulling money out of their investment accounts. All the while, the stock market steadily slides lower.
Seems like “buy the dip” is dead.
