Tracking the NYSE margin debt from 1979 to the present

As I said last week, the bulls aren’t in a hurry, but I’m sure the bulls remain optimistic that the Dow Jones will make history sometime in the weeks and months to come.

What happens after that is the question. Last October the Dow Jones made a handful of BEV Zero’s, and then began a three month 18 percent correction, as seen in the BEV chart below.

The following table is something new, where I look at the major market Indices I follow in Bear’s Eye View (BEV) terms. The BEV is very versatile as it disregards numerical values; rather it sees these market indexes as Mr. Bear does: in terms of new all-time highs (0.00 percent or BEV Zeros) and negative percentage clawbacks from those new all-time highs. Because of this, we can directly compare the Dow Jones close of this week of 26,543 with that of the S&P 500’s 2,939.

The Dow Jones failed to break above last October’s BEV Zero (new all-time high), not a 0.00 percent for the Dow Jones all this week. But the S&P 500 (last row) made new all-time highs this week on Tuesday and again on Friday.

I’m not finished with this table yet. With more work on it, I can get it to sort from the strongest indices (BEV Zeros/zero percent) to the weakest, which for this week was the NYSE Financial Index, closing the week down 19.16 percent from its last all-time high. I note the NASDAQ Banking index is also weak, down 14.82 percent from its last all-time high. Since the 2007-09 credit crisis, these banking indexes have lagged far behind everything else. That is a sign of internal market weakness.

Still, at the close of the week, we see seven of the nineteen indexes in the table closing at new all-time highs, with others less than 5 percent away from their last all-time highs. What is there to say, except the bulls still have control of the stock market.

The Dow Jones is currently 1.06 percent away from making history, easily within scoring position. But if you look at it in its daily bar chart below, it’s obvious it’s not in a hurry to break above last October’s 26,838.

We are now four months from last December’s 18 percent correction bottom. In the first two months of the recovery the Dow Jones moved up at flank speed, but since the end of February, it has slowed considerably. I think of this current pause in hot-market action as a correction in the market, one that uses time instead of declining prices to consolidate the market.

I don’t know when the Dow Jones will join the S&P 500 in making market history with new all-time highs. But given this current correction in time the Dow Jones is now enjoying, when it does break above the highs of last October it should run higher for a while. If it doesn’t, if it does a reprise of last October-to-December’s market action, that would be very bad.

I’m not making a prediction here, but I wouldn’t be surprised if it did. Let’s have a look at NYSE Margin Debt (Blue Plot) with the Dow Jones (Red Plot) from 1979 to its latest data of March 2019, (chart below). I inserted a table in the chart; in May 1979 margin debt was $11.13 billion as the Dow Jones traded in the low 800s.

Many people alive today have never seen the Dow Jones trade below 1000, and on Forbes’ current list of the top 100 richest people in the world (unlike in 1979) are currently all worth more than $11 billion. That seems important, and what explains the difference between then and now — the Federal Reserve’s inflationary monetary policy.

One thing this chart makes very clear is how our Dow Jones’ bull market, which began in 1982, and NYSE margin debt have a relationship with each other. That’s not saying the Dow Jones doesn’t have sources of “liquidity” other than margin debt. Margin debt is used by retail speculators in the stock market. Just looking at the data I do have, margin debt and the Dow Jones for the past forty years may best be understood as cause and effect.

I’ve highlighted three peaks in margin debt:

• March 2000 $278.5 billion

• July 2007 $381.3 billion

• May 2018 $669 billion

Following the first two peaks, the stock market saw significant bear markets. During the NASDAQ High-Tech market crash of 2000-02, the Dow Jones deflated 38 percent in October 2002 as margin debt deflated by 52 percent. Within two years after NYSE Margin Debt peaked in July 2007 the Dow Jones deflated by 54 percent as margin debt also deflated by 54 percent.

The current situation with NYSE Margin Debt and the Dow Jones is a bit different; after margin debt peaked last May the Dow Jones saw an 18 percent market correction in December as margin debt deflated by 14 percent. What’s odd is seeing the Dow Jones currently only a whisker from its last all-time high of last October as margin debt remains basically unchanged. Maybe when retail investors regain their confidence they’ll once again take NYSE margin debt to new highs, providing the fuel needed for the Dow Jones to do something really spectacular — maybe.

My next chart shows the above two data series but indexed to May 1979 = 1.00. From 1979 to 1999 these plots fit almost on top of each other; then as the NASDAQ high-tech bubble inflated to its peak value in March 2000 the Dow Jones appears unchanged in the chart.

The most likely reason for that is margin debt flowed into the NASDAQ bubble; from May 1999 to March 2000 the NASDAQ Composite index increased by an incredible 103 percent! As margin debt deflated (2000-02) the NASDAQ Composite crashed a whopping 78 percent compared to the Dow Jones’ 38 percent market decline.

Following the October 2002 bottom of the high-tech crash a new, and possible troubling trend developed in margin debt, where increases in margin debt were not followed by proportional increases in the Dow Jones, as seen by the growing gap between the two plots above. Why would that be? The most likely reason is since October 2002 the world changed.

In August 1982, I was serving on the USS Schenectady (LST 1185) Electrical Division with another electrician who was also interested in the markets. I had the ship’s TV system in my shop, where Peter and I would watch the Nightly Business Report on PBS when we were in port.

One day we dared each other to go and buy some stock. Barron’s had just published an article on the depressed valuation of Exxon; the giant oil company was paying a double-digit dividend. I’d been following the new biotech company: Genentech. The stock market’s mood was foul, meaning prices were cheap; time to put up or shut up!

We put in a request chit for a day’s liberty to “buy some stocks.” Our chain-of-command had never seen that excuse used for a day off before. Walking our chits up the chain we got chuckles from our Chief all the way up to the Executive Officer as they signed them, but they all approved our request to “buy some stocks.”

The Schenectady was homeported in San Diego’s 32nd street Naval Station; a short drive to La Jolla we found a broker. We left the ship early so we could skip “quarters”; the daily ceremony where naval commands daily mustered their crews. We even arrived at the broker before the doors were opened, so we waited.

A short time later an older gentleman arrived, seeing two anxious young sailors waiting at the door for him. With a grin, he asks us what we were doing there. “We want to buy some stocks!” Oh he said, and what stocks do you want to buy? Exxon for one, a choice he approved of and then we said Genentech, which changed his grin to a wide smile as he said, “Oh, we’re not speculating are we?”

We entered the building to fill out the paperwork and to wait for the markets to open. This was a new experience for me; what did I know of the workings of a stock brokerage? If the phones are constantly ringing before the office is opened, that must be how things are. Into the process of creating an account, after maybe about fifteen minutes, the broker stood up and commented; “What’s with these phones today? We’re not even open yet!”

As it turned out, Peter and I “bought some stocks” on the first day (or darn close to it) of the bull market that has gone on now for the past thirty-seven years. On that morning the world had changed, though at that time no one knew it.

By December 2000, everyone knew about the bull market on Wall Street. Even my mother, a child of a North Dakota sharecropper during the Great Depression caught the fever and had a stock portfolio. I never thought that would happen! But if you remember the daily mania televised live on CNBC on the NYSE floor during the late 1990s, exactly as it had in the late 1920s, the bull market had become a national mental disorder.

Following the high-tech bust of 2000-02 retail investors were down but not out. They were more than willing to once again risk money in the stock market, or better yet borrow a quarter of a million from the bank to speculate in real estate, which from 2002 – 07 was the real bull market.

It’s one thing to lose 50 percent of invested funds in the stock market. But for a wage earner to lose 50 percent or more of borrowed funds in a no-money-down leveraged real estate speculation is a crippling experience that can impact them for the rest of the days of their lives. That’s what happened to many in the subprime market crash; their world changed right in front of their eyes. For this reason, I can’t believe public participation in the financial markets in 2019 is as broad as it was in 1999 or even 2007.

That doesn’t mean that the public isn’t in the stock market, but for those who remain, apparently, they have chosen to leverage their positions with margin debt as maybe they have never done before. Or so looking at the above charts suggests.

The following chart’s plot is simply a ratio of the indexed values of NYSE Margin Debt to the valuation of the Dow Jones plots seen in the chart above. Take the time to study the chart below with the one above to see exactly what this data is telling us.

After the high-tech bear market bottom below, we once again see the world changing, where increases in margin debt failed to generate a proportional increase in the valuations of the Dow Jones. And when the Dow Jones experienced its second largest percentage decline since 1885 (October 2007 to March 2009), margin debt remained relatively high to the valuation of the Dow Jones during this crash.

That sure didn’t happen during the Great Depression crash. As seen in the table inserted in the chart below, from 1926 to 1929 the Dow Jones was up by 138 percent as margin debt increased by 120 percent. And during the crash, the Dow Jones deflated by 89 percent as margin debt also decreased by 89 percent.

Since October 2002, increases in margin debt have failed to generate a proportional increase in valuations in the Dow Jones, and on market declines investors have chosen to leverage their capital losses with margin debt — and the “why” is a mystery to me. Obviously, that’s how things sometimes go when the world changes. But one thing that will never change is how Mr. Bear will eventually root out all market inconsistencies.

I don’t know the when, but I can see the what coming, and what’s coming is retail investors are going to deleverage their positions in the coming historic bear market, exactly as they did in the depressing 1930s. And given the amount of margin debt currently in the stock market, Mr. Bear should have little trouble driving market valuations far below where they are now.

Gold didn’t do much this week either. Gold remains a market where the bears can’t force valuations down, and the bulls seem incapable of driving valuations up. So, for the past many weeks now gold remains attractive in its BEV chart below.

When you can buy cheap, which greatly minimizes the downside risk of any investment, at times like this, it can make sense to just psychologically walk away from a market; or buy it and then forget about it. As spring of 2019 slowly turns into summer, that seems the thing to do for anything having to do with precious metals.

And for gold’s step sum chart below, nothing new is going on there either. One big positive to be seen in the two charts for gold above and below is since 2013 when gold broke below $1400 (six years now) gold has been building a huge base.

The market action for gold since 2013 is very similar to what the stock market bulls had to deal with the Dow Jones from 1966 to 1982, where a line of resistance became perceived as a line of doom.

Below, from 1966 to 1982, the Dow Jones for sixteen years attempted to break above, and stay above 1000 five times, only to fail on every attempt. Then in August 1982, it made its sixth attempt and the rest is history.

This is how I understand the current situation in the gold market; that $1360 is now its “line of doom.” But for as long as the bears can enforce their line of doom, the bulls are building a base from which much higher prices can be supported. That happened for the stock market above from 1966 to 1982, and I expect that is what’s happening with precious metal assets since 2013.

I hope gold’s current line of doom isn’t as long-lasting as was the Dow Jones’, but it will go on for as long as it does. So don’t use your rent money to invest in gold or silver.

Looking at the Dow Jones step sum chart, as is happening with gold not much is changing. But seeing the Dow Jones valuation plot (Blue Plot/market reality) rising as its step sum plot (Red Plot/market sentiment) is slightly trending down is a big positive for the Dow Jones.

Here are the step sum tables for gold and the Dow Jones. Gold’s step sum closed this week exactly where it was on March 22nd: 244. In other words, in the past twenty-five trading sessions, gold has seen about as many daily advances as declines, yet the price has declined by $27. Sometimes that’s how things go.

The Dow Jones, on the other hand, has seen its step sum advance from 503 to 507 in the past twenty-five trading sessions, as its valuation has advanced by 1,041 points. A hearty well done for the stock market bulls, and I also note how market volatility (daily) for the Dow Jones is about to break below 0.70 percent. That’s a positive too.

(Featured image by DepositPhotos)

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.