On Demand

NYSE Margin Debt: Near Dangerous Levels $SPX

Recent market action can easily be described as unhealthy. Last Monday the U.S. stock markets opened higher and later sold off due to a Financial Times article released midday speculating Fed tapering. After getting spooked, the author later tweeted out to market participants to “chill out.” The market recovered from its lows soon after.

If it wasn’t so dangerous it would be funny.

George Melloan in his 6/18 Wall Street Journal opinion piece How the Fed Turned the Markets Skittish said it best, “We are in an age where the eight male and four female members of the FOMC are responsible for whether securities markets float or sink. Traders around the world who in better times considered a range of variables now focus on a single one, Federal Reserve policy.”

We have written in the past about a coming market correction and have attempted to provide the appropriate evidence that supports our thesis. Another concern for us, especially in this Fed risk on/off binary market are the large margin debt levels.


It’s one thing for investors to have been put in a position to abnormally seek risk, but now we are borrowing money to do so. Historically this has been shown to be disastrous.

When looking at the chart below, one can see the NYSE margin debt balance back to 1990. The problems arise when the debt levels rise well above the linear trend line. We are approaching those dangerous levels of margin debt.


We hate to sound like a broken record, but we continue to advise our newer clients not to chase the rally. We are of the opinion that we will ultimately be offered a much better entry point. For our existing clients, we have taken profits on positions bought in 2012. We remain largely in cash and have been building positions that move inversely to the general U.S. indices.



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Visitor - Maria: Comment...I think this is an article that is important to all those that have not been following this rally when it began - seven months ago - to read. I was really touched by your concern for your clients.

About the Author


Mr. Kalinowski is a chartered financial analyst who began his career in the securities industry in the early 1990’s.  He worked with First Asset Management, Yankee Financial Group, and I/B/E/S in the 1990’s.    


In 2000, Thomson Financial, a leading provider of global financial information purchased I/B/E/S and promoted Mr. Kalinowski to Senior Equity Strategist.  As a Senior Equity Strategist, he was responsible for the integrity of all research and documents produced by his department.  During his tenure at Thomson, he developed numerous products based on his research, including Aggregate Data Points and Monthly Comments, establishing himself as a resource to buy- and sell-side institutions globally. 


Mr. Kalinowski is recognized by the Wall Street community as an expert in earnings forecasting and macro analysis.  As a resource to institutional investors as well as policy makers at the Federal Reserve Central Bank, Mr. Kalinowski is frequently called upon by institutional investors and members of the Federal Reserve board as a source regarding the sentiment of analysts, institutional investors, strategists and money managers. 


Mr. Kalinowski has appeared on financial news programs,  including CNBC, CNN and Bloomberg TV, has been cited in financial publications, including Financial Times, Barron’s and The Wall Street Journal, and has authored articles for various publications, including Global Investor, Buyside Magazine and The Street.com.


Mr. Kalinowski is currently the Chief Investment Officer for Capital Trust & Associates.

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