Margin Debt Surges
Opinion: The indexes closed mixed Friday with positive internals on the NYSE and NASDAQ as volumes increased on both exchanges. No technical events of import were generated on the charts, leaving all of the short term trends intact. The data remains mixed as well yielding no high probability directional implications. However, the use of margin debt has risen once again suggesting the increased risk of a need to deleverage should the markets experience a correction from the recent rally.
· On the charts, The SPX (page 2), DJI (page 2), COMPQX (page 3) and DJT (page 3) closed lower on the day Friday while the MID (page 4), RTY (page 4) and VALUA (page 5) saw marginal gains. No technical events of note were generated on the charts leaving the COMPQX in its short term uptrend while the SPX and DJI are in short term downtrends and the rest remain neutral. The COMPQX and VALUA are now overbought on their stochastic readings but have not signaled a bearish crossover.
· The data is mixed. All of the McClellan OB/OS Oscillators are neutral with the exception of the NYSE 1 day that is now mildly overbought (All Exchange: +46.0/-3.3 NYSE:+54.03/+15.48 NASDAQ:+43.38/-0.31). The Equity Put/Call Ratio is neutral at 0.56 as well as the Gambill Insider Buy/Sell Ratio at 18.7. However, the Total (contrary indicator) and OEX Put/Call Ratios are bullish at 1.19 and 0.53 respectively. Also, the new AAII Bear/Bull Ratio (contrary indicator) finds the crowd is nervous with more bears than bulls at 37.38/30.22.
· Counterbalancing some of the positive data is the increased use of margin leverage in the markets (page 9). Margin debt is now up 21% on a y/y basis to an all-time high of $513B. Should the markets start to correct, the need to deleverage would likely accelerate and intensify the degree of said correction.
· In conclusion, our near term “negative” outlook for the major equity indexes remains unchanged given extended valuation, investment advisor complacency, current short term trends and the high degree of leverage being currently employed.
· Forward 12 month earnings estimates for the SPX from IBES of $132.89 leave a 5.62 forward earnings yield on a 17.8 forward multiple, near a decade high.
SPX: 2,342/2,373
DJI: 20,109/20,865
COMPQX; 5,795/NA
DJT: 8,906/9,283
MID: 1,687/1,728
RTY: 1,338/1,384
VALUA: 5,331/5,477