Big-Picture Trading Themes

ironchef said:
Thanks srinir,

First of all I want you to know I have no opinion on this subject matter and so do not have a dog in this fight.

Second, I am not an economist nor have a finance background so really don't know at what % of market cap is margin debt dangerous.

Third, thank you for the link to the article. What puzzle me is the chart in the article was not consistent with the conclusion of the article title. Here is the chart:

View attachment 174849

It seemed to indicate we are marching toward the next crush according to the chart. Maybe not today but could be in the not too distant future?

Best to you.
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Title of this thread is big picture trading. My contention is that looking at Margin debt is not that helpful in predicting equity markets. Even title of posted Bloomberg chart also says the same thing. Margin debt pretty much follows the price momentum. Equity markets is the big dog and margin debt is the tail in this regard. Investors lever up during bull market and delever when price momentum breaks or slows down. There are many journal articles explaining price momentum is one of the factors in explaining returns. If this is the case why follow margin debt instead of price itself.

Barry ritholz says Margin debt is a coincident indicator in the linked article. Currently I can see April month data. So it is more than one month old coincident indicator. Better to use current price momentum data, if I am in predicting business.

I do not use raw data or normalized data myself. If I were to use this data than I would rather use normalized data either to market cap or to GDP instead of the raw data. My reasoning is somewhat similar to comparing bank leverage ratio’s. Since margin is used for leverage equities makes it what somewhat similar. Just as an example, if I am to look at Tier 1 capital of GS and compare to 2007 levels it does not give me any good insight. If I compare to Tier 1 capital to risk weighted asset ratio, then I can gleam some insight and should be comparable to previous years.

I do not understand your post regarding Barry's article not consistent with the conclusion of the article. His conclusion was absolute level of margin debt is meaningless. That article is written mid 2015. That is not his chart. He is looking at 2013 chart posted by dshort and makes comment of fallacy of looking at levels of margin debt. Anyone who followed dshort’s advice in 2013 based on levels of margin debt would’ve been 50% poorer.

Margin debt is sidebar to this thread. It is not fair to OP to hijack this thread.
 
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srinir said:
Title of this thread is big picture trading. My contention is that looking at Margin debt is not that helpful in predicting equity markets. Even title of posted Bloomberg chart also says the same thing. Margin debt pretty much follows the price momentum. Equity markets is the big dog and margin debt is the tail in this regard. Investors lever up during bull market and delever when price momentum breaks or slows down. There are many journal articles explaining price momentum is one of the factors in explaining returns. If this is the case why follow margin debt instead of price itself.

Barry ritholz says Margin debt is a coincident indicator in the linked article. Currently I can see April month data. So it is more than one month old coincident indicator. Better to use current price momentum data, if I am in predicting business.

I do not use raw data or normalized data myself. If I were to use this data than I would rather use normalized data either to market cap or to GDP instead of the raw data. My reasoning is somewhat similar to comparing bank leverage ratio’s. Since margin is used for leverage equities makes it what somewhat similar. Just as an example, if I am to look at Tier 1 capital of GS and compare to 2007 levels it does not give me any good insight. If I compare to Tier 1 capital to risk weighted asset ratio, then I can gleam some insight and should be comparable to previous years.

I do not understand your post regarding Barry's article not consistent with the conclusion of the article. His conclusion was absolute level of margin debt is meaningless. That article is written mid 2015. That is not his chart. He is looking at 2013 chart posted by dshort and makes comment of fallacy of looking at levels of margin debt. Anyone who followed dshort’s advice in 2013 based on levels of margin debt would’ve been 50% poorer.

Margin debt is sidebar to this thread. It is not fair to OP to hijack this thread.
More...
Your points are well taken. Thanks.
 
After doing some research over the weekend, I don't think this trade's time has come. Maybe it happens, but wouldn't overly position a portfolio for it yet.

I'll share my thoughts over the week and trades if there's interest.
 
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