investmentcontrarians.com / By Sasha Cekerevac I had an interesting conversation the other day with a friend of minewho asked a very compelling question: with margin debt in the equities market hitting a new all-time high—$401 billion on the NYSE in September—is this a sign of a market top?
To find out what this really means, we have to dig a little deeper into how this can affect the equities market.
An increase in margin debt is really a story of investor sentiment. As the equities market moves up, this gives people more confidence and therefore increases investor sentiment. Many investors then borrowmoney to invest in the seemingly bullish market—this creates margin debt.
Now, this all sounds great on the way up, but in the end, the problem with higher levels of margin debt is twofold.
First, the very fact margin debt is increasing can be looked at from various angles. One is the obvious point of view that investor sentiment is becoming increasingly bullish on the equities market, so people are borrowing to get in on the action.
Another way to look at higher levels of margin debt is that while borrowing money to put into the equities market is bullish, as more money is chasing the same number of shares, at some point, if everyone is in the market, who’s left to buy?
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