01/18/24 08:58 AM EST

Rising Margin Debt Suggests Return of Levered Buying

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.

Today’s bonus chart shows two time series: SPX and the year-over-year percentage change in FINRA Margin Debt. The green line represents the S&P 500, and the Margin Debt year-over-year percentage change is the red line.

For our brand-new readers, margin refers to using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. Traders use margin for leverage, which allows them to increase the size of their trades and potentially magnify their profits.

Much like the Tier1 Systematic Index, we can discern periods of markedly high exposure, notably during the years 2000, 2008 and 2021, as well as phases where investors are either ramping up or scaling down from these peaks of exposure. Presently, margin debt is on an uptrend suggesting levered buying is returning. If we observe the ISM, a measure of the business cycle, rebounding above the 50 threshold later this year, we'll be able to point to the prescience of the market.

However, absolute levels of margin debt remain low and relatively high costs of margin debt under the current interest rate regime suggests there are limits to the information content under much changed conditions.

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