crash acoming?

Further to your highlighting Helene Meisler’s comments and graph on NYSE margin debt, for several years I too have tracked this number and have found that when combined with VIX as a measure of investor complacency, it is a useful tool for raising orange and red flags around market tops.

The fundamental ‘thesis’ of combining margin debt and investor complacency in one index (margin debt divided by VIX) is that a combination of high investor leverage and high investor complacency is a toxic mix indeed. As you know, margin debt figures are reported with a one month lag, so to try the make the indicator more timely, I estimate margin debt one month in advance.

Thus, for March 2012, I estimate NYSE margin debt could be in the range of $300-$305b. Dividing 300-305 by 13.66 (the VIX low in March so far, on Mar 16th) yields an indicator value of 21.96 to 22.33. On the basis of historical experience, I treat any indicator value above 20 as an orange flag and any indicator above 22 as a red flag. Thus the estimated March figure of approx. 22 is enough to prompt me to “head to the hills” i.e. seek refuge in high cash reserves.

Stated another way one might say that NYSE margin debt above $300b is a worry in and of itself but when combined with high levels of investor complacency as measured by a low VIX, the danger signal is magnified and intensified.