Market Warning Signs

I read a book many years ago regarding warning signs that the market may show and while there were way too many to be even slightly reliable I do believe that this warning sign carries enormous weight – especially when I can see what transpired many years after the book was written.

As we all know when we open a brokerage account we have the option to have a margin account. That means that when we buy stocks, the brokerage house will match our funded account which enables us to buy stocks at a discount. I myself do not use margin since we need to pay the interest and in the event the stock drops in price we will get a margin call.

However this is a very common practice among many investors and the consequences of a dropping market, propped up by lots of margin can lead to very adverse stock market price drops.

I did a Google search for “NYSE margin debt” and was able to share with you how once margin debt exceed previous margin debt with a rallying market the market has gone into an amazing slide.

Of course this does not happen the very next day. We were able to see that there is approximately a six month window of time.

When this market drop begins realize that the potential for amazing profits (unprecedented profits for some) will be more than welcome!

Following is a graph from the Google site that shows margin debt reached all-time highs March 2000 and July 2007 which coincided with the markets reaching their highest levels (for those times).  We are really close to taking out July 2007’s highest margin debt.

warning

Source: http://www.businessinsider.com/nyse-margin-debt-2013-12

Again generally the markets have a tendency to rally into the New Year so we shall trade what is happening and not what we think will happen!