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Real Time Insight

One of the most talked about charts among bears and other value-minded investors is the level of margin debt on the NYSE. I take this version of the situation (data current as of June 30, 2013) from Doug Short, who has been keeping a close eye on the metric this year.

Doug has several versions of this data on his website. Here is his explanation of this chart and the patterns he is highlighting...

"This chart shows the two series (NYSE margin debt vs the S&P 500) in real terms — adjusted for inflation to today's dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its an all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July, 2007, three months before the market peak."

Though it would be nice to see the July data that shows margin debt has declined from lofty levels above $300 billion, there are important themes here we should be asking about the peak in April and corresponding peaks to come in the market and in the Fed's QE programs.

Is the level of margin debt and its relationship to excess speculation cause for concern now?

Does it need to get washed out with a major correcction before the bull market can go higher?

On a related theme, while many smart people say that QE has been the sole driver of the stock market rally this year, I haven't seen any direct evidence to convince me of this supposed fact. Low interest rates clearly help the asset class, but Fed bond purchases don't directly put money in stocks. Call me naive, but I want to see the math first.

Where do you stand on QE and stock prices?

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