Executive Summary

• Declining margin debt will signal an impending major market decline 
• This signal will be even more telling for non-US countries
• Evidence indicates we are passing the peak margin debt cycle right now
• There is time to act, but time is running out

If you have not yet read Part 1: The Margin Debt Time-Bomb available free to all readers, please click here to read it first.

In the meantime, monitoring trends in levels of margin debt is one of a necessary number of risk management tools.  Meaningfully declining monthly levels of margin debt ahead will be an important red flag.  The key is knowing it will come and being able to act unemotionally and rationally when it occurs.  For now, in the clarity of hindsight, we have the very short term divergence in place between price (SPX) and margin debt levels as of month end July.  Now it’s a matter of continuing to monitor margin debt levels ahead as one of a number of important risk management tools. 

I think it is important to note that in the two prior market cycles, margin debt declined noticeably after the year over year change in S&P 500 sales (revenues) fell into negative territory, as we are now seeing in 2015.  As you can see from the chart below, the year over year change in S&P 500 sales from 2014 to 2015 has crossed into this negative territory.