Could Margin Debt Tell Us When the Bear Market is Over?

I was looking at historical NYSE Margin Debt data. The person that posted this link at OEW stated that negative monthly divergences may indicate the end of bull markets. I decided to look at it from the opposite perspective, since I do give credence to margin debt's effects having experienced it myself many years ago. The 3 largest cyclical bear markets you can think of from the beginning of their data in the 1950s are probably the ones ending in CY1974, CY2002 and CY2009. The CY1970 and CY1987 lows were also pretty dramatic, so let's take a look at margin debt (in millions of $) in those 5 time periods.


1. June 1968-July 1970 = 6690-->3780 = -43% vs. Dow -36% peak-to-trough
2. Dec 1972-Dec 1974 = 7900-->3910 = -51% vs. Dow -45%
3. Sep 1987-Jan 1988 = 44170-->31320 = -29% vs. Dow -36%
4. Mar 2000-Sep 2002 = 278530-->130210 = -53% vs. Dow -38%
5. Jul 2007-Feb 2009 = 381370-->173300 = -55% vs. Dow -54%


Here are some things that stand out to me.
1. The peak-to-trough months for the Dow and margin debt don't align exactly, but perhaps that speaks to the divergence argument.
2. The percentage drop in margin debt exceeded the percentage drop in the Dow in 4 of the 5 cases with the relative brevity in time and price of the CY1987 price low probably skewing that example.
3. For the 4 lengthy bear markets (excluding 1987), margin debt fell an average of 51% while the Dow fell an average of 43%.
4. For the 3 cyclical bear market lows we most recognize (CY1974/2002/2009), margin debt fell an average of 53% while the Dow fell an average of 46%..


Using those observations and assuming this bear market will approximate the bear markets ending in CY1974/2002/2009, margin debt is likely to fall a little more than 50% and the Dow is likely to fall a little less than 50%. Of course, my own exponential parabola theory suggests this bear market could be bigger and faster in which case both margin debt and Dow are likely to reach 50-60%+ drops.


It's not shown in the data above, but, once margin debt was cut in half during the bear markets in CY2000-2002 (Sep 2001 and July 2002) and CY2007-2009 (Dec 2008) and CY1972-1974 (Oct-Dec 1974), you had witnessed Dow lows in those months that covered 80-100% of the entire bear market's loss. So, using this information in large bear markets, one could start looking for long-term bull market investments in the 3-6 months after margin debt is cut in half. If the current bear market is more harsh, one could wait a little longer or scale in long, but it appears the easy money is gone and the bottom-forming gyrations are bigger once margin debt has experienced a 50% haircut.


According to the link above, margin debt peaked at $507,153 million in April 2015 and is currently $461,200 million for December 2015. Perhaps we should be looking for margin debt to fall to ~$250,000 million to signal the bear market is coming to an end. Something to keep in mind. Use it or lose it. Good fortune.


Apr 2015 - ?2016? = 507,153--> <253,577? = -50% vs. Dow -??%