Since May, United States Margin
Credit accounts have been increasing on a monthly basis according to
NYXData.com. As stock investors have
continued to borrow to fund their purchasing of equities, Investor Net Worth as
measured by the difference between Total Free Credit and Total Margin Debt as
grown to historic levels.
This means
that should brokerages decide they don’t want the interest from margin lending
and decide to call in margin accounts, those without the proper levels of cash
in their accounts will be forced to liquidate their holdings to appease their
brokerages.
It is this relationship that many
have speculated has caused a floor during broad US market index contractions as
margin calls haven’t come and those holding US equity assets with borrowed cash
weren’t forced to sell. Now that we have
seen a slight contraction in margin credit, recent history shows that a
contraction like this precedes a broad market sell off:
Here is the chart showing the
valuation Investor Net Worth which again is the difference between Total Free
Credit and Total Margin Debt:
You can see that Margin Credit
levels are currently at all-time highs, which has sparked cause for concern among
investors:
