By Mark Hulbert
CHAPEL HILL, N.C. – Rarely will both the bulls and the bears claim that the same indicator supports their position. Yet that is the case currently with margin debt.
I’m referring to the total amount that investors borrow to purchase stocks, a sum that historically has risen during bull markets and fallen during bear markets. FINRA gathers the data and releases monthly totals with a several-week time lag. The April data, which was released a week ago, showed total margin debt to be $163 billion (or 17%) below the level reached in October, when it peaked.
On the one hand, bears can point to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, who found that there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it’s below. Those are ominous odds, since in January margin debt fell below its 12-month moving average and each month’s total since then has remained below that average, as this chart shows.