The indicator that predicts nothing

The long-standing myth that margin debt levels are a leading indicator of the direction of stock markets has been shattered once again.

In recent years, the "Hindenburg Omen" indicator has been triggered multiple times, predicting a market crash that has not happened. This is when margin debt level exceeds the S & P500 price. As we can see from the chart, we have had such a situation since 2010, but stock markets have never collapsed.

So why don’t I consider margin debt a valid indicator? Because as markets reach new highs, so too does margin debt. As we have previously discussed, new highs are a good thing.
During a bull market, those new highs occur with regularity. As my colleague Josh Brown notes: On a daily basis, the S&P 500 trades at an all-time high 7% of the time and trades within 5% of an all-time high 36% of the time. This means that on 43% of all days, since the S&P 500’s inception, US large cap stocks were at or close to making new records. It should come as no surprise then that NYSE margin debt keeps rising.

Source: Bloomberg Pro Terminal

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