Chart 1: Margin debt peaked in February while the market continues higher
As we all should be well aware by now, NYSE Margin Debt peaked in February of this year even though the stock market continues to rise ever so vertically. If we look at the last two decades by observing both Chart 1 and Chart 2, we should be able to notice that a peak in margin debt is usually a warning signal that the broad market is also close to a top as well.
Furthermore, Chart 2 shows that a leverage peak correlates closely to a top in a investor darling sector of the time. In 2000, it was the Internet bubble, in 2007 it was the Financials bubble and 2014 it is Biotechs.
So far, the S&P 500 has ignored all of these warning signs. Nevertheless, volatility continues to remain extremely low for both the index itself as well as in other asset classes, while the technical perspective is showing the US index at a very much overbought level right now. It will be interesting to see how the market behaves in coming weeks.
Chart 2: Previous margin debt peaks were early warnings of a major top
