12/05/23 09:39 AM EST

Margin Debt Falling

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Margin debt is the sum investors borrow from brokers using a margin account, offering a leveraged position to potentially magnify returns. This method lets investors capitalize on a stock's upward movement without fully committing capital, thus enhancing potential rewards (or risks).

FINRA's latest data reveals investors have been taking on LESS leverage through margin during this latest Saturn V-style rally. For the third month, margin debt has retreated, settling at $635.28 billion. There is a 6.7% reduction month-over-month and a 2.2% decrease compared to the same time last year, after adjusting for inflation matching the 6.7% monthly fall and deepening to a 5.3% year-over-year descent.

We should also note that margin debt figures are usually a fortnight old when revealed. For instance, August figures are disclosed around mid-September. Historically, from 1997 to 2000, margin debt mirrored market trends, then rose steeply. After the tech bubble burst, its ascent was more gradual until a steep rise around 2006, reaching its high point in 2007. Peaks in margin debt often precede market highs, as observed in December 2021 which trailed an October margin debt peak. Interestingly, the recent market dip in September into October was on the heels of the margin debt peak in August. However, the November rally was not supported by a correlated rise in margin debt.

Learn more about the Market Situation Report written by Tier 1 Alpha.