Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes to explore with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!
The purpose of this note is to add some extra context and color. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to. But inevitably if you keep an eye on the charts they tend to help tell the story, as you will see below.
So here's another S&P 500 #ChartStorm write-up!!
1. FINRA Margin Debt (used to be called NYSE Margin Debt) - back towards the highs.. Much has been made of the Robinhood Trader in 2020, drawing concerns about an overvalued and frothy stock market. Another question to posit is, “What are bigger traders doing?”. Well, first up this week is a look at margin debt. It is thought that more sophisticated traders leverage their accounts with a debit balance, hoping to score big gains (typically from the long side).
Some technicians consider margin debt to actually be a smart money indicator, meaning it is bullish as it breaks to new highs, but by simply looking at history, you can be your own technician and see that peaks in margin debt often coincide with peaks in the stock market. The chart below from Topdowncharts.com goes back to the late 1990s – the three market peaks are evident (though early 2020 did not set a new record high margin debt figure) while lows in margin debt happen at stock market bottoms. We find ourselves today venturing back toward the 2018 peak as traders turn more optimistic.
What’s interesting about the latest move is that it comes during a period of heightened volatility. The VIX has averaged nearly 30 this year, which would make 2020 the third most volatile year since 1990 (next to 2008 and 2009). A rule of thumb in the trading community is to limit your position size when volatility turns up, but that doesn’t appear to be happening. A common ‘but actually..’ response to this chart is to adjust it for market cap gains over the decades – we’ll analyze that in chart 2.
Bottom line: Traders are leveraging up their accounts the most since 2018 as the 2020 stock market continues to generally grind higher. We now see a little more participation from small caps, and even non-US stocks are hanging in there. Volatility is still elevated, so a quick move lower could shake out these leveraged long positioned traders.
2. And here's price-adjusted growth of margin debt... After a period of deleveraging, traders are piling back in. @topdowncharts brings us this chart of margin debt growth minus the S&P 500’s performance on a 1-year rolling basis, along with the S&P 500 in black. For those clamoring about how bearish it is that margin debt is spiking, well this one may cause them to hold their horses.
Things are not as frothy as they may have appeared. The rally in the stock market has been exceptional in the last several years while margin debt growth has been lackluster. What jumps out on the chart are the huge spikes in the red line during 1999-2000 and 2007. Bear in mind that the S&P 500 was rallying during those periods as well, so the growth in margin debt was explosive then. We aren’t seeing that now.
Equities are rallying without a ton of help from leveraged long traders. In fact, the 2018 to early 2020 period saw some of the biggest relative declines in margin debt versus S&P 500’s growth. That brings us to today. After two years of unwinding leveraged positions, traders have turned more aggressive. The red line has crossed back above 0% - meaning margin debt has grown more than the S&P 500 in the last year. Call it normalization after the COVID-crash storm maybe, but it should also be a warning sign of some complacency.
Bottom line: Sophisticated traders (who knows how sophisticated they actually are..) are turning more bullish as evidenced by the year-on-year growth in margin debt versus the S&P 500’s return. It is by no means a bubble environment, but deleveraging may be over for now.
3. Similarly, hedge funds seem to be "all-in" on equities. @MacroCharts gives us a different view, but a similar conclusion – leverage is on the upswing once again. Hedge fund gross and net leverage has surged to the highest levels in several years. Low borrowing rates and better access to capital now versus earlier this year may be aiding hedge funds’ ability to juice-up their accounts. It’s fascinating to analyze various groups of traders and investors regarding their sentiment and positioning.
While some indicators point to ho-hum sentiment and with retail cash holdings being elevated, bigger traders (i.e. hedge funds in the below chart) are positioned hyper-aggressively. We mentioned volatility earlier – if another correction is on the horizon, the move could be hard & fast given hedge fund allocations right now. Then again, maybe these hedge funds are also doing a little performance chasing into year-end after a tumultuous year.
Bottom line: Brokerage accounts and hedge funds have turned much more aggressive in the last several months as optimism cascades across the financial markets following the massive February-March bear market. Portfolio managers should be on-guard regarding this uptick in frothiness among some investor groups.
4. Interesting take on election cycle stock market performance... Note the top and bottom lines. @MikeZaccardi grabbed this chart from Bank of Americ