The holy grail of trading is an indicator that can perfectly time market inflection points. It doesn’t exist, of course (though TLI comes pretty darn close). However, over time investors will accumulate a stable of those that – together – can give you a sense of the risk/reward in pursuing the current market trend. One of those is a positioning indicator, proxied by margin debt. And it suggests the bear market may be nearly over. Wait, what?
In markets, everyone is always trying to figure out what everyone else is doing. That’s a huge part of investment research. To give it a thin veneer of respectability you might call it flows and positioning analysis. The aspiration and your own firm belief, of course, is to be an independent thinker and stand out from the crowd. In reality, a lot of energy is devoted to making sure you’re not … missing out. FOMO is big.
“Anyone doing anything interesting?” is not uncommon in Bloomberg chats hedge fund honchos have with trading desks. Most of the time, it’s boring. Everyone is already in the same trades. Sometimes, however, positioning can be so extreme it really is valuable information that can mean you’ll beat the crowd to the exit (or entrance). This may be such a time.
Margin debt is a good proxy because it more completely captures total retail flows into (and out of) the equity market. It’s the amount of money an investor borrows from the broker via a margin account. Typical margin requirement is 25%, meaning that customers’ equity must be above that ratio in margin accounts to prevent a margin call.
Low margin debt suggests that retail exposure through brokers is low. It also suggests the market is now less prone to big selloffs because the threat of a margin call – that might accelerate selling in order to meet it – is now substantially less, or zero.
And, if recent history is correct, the level of desperation may indeed be high enough to see the market bottom relatively soon.
Idea Spotlight: PayPal
TOGGLE analyzed 20 similar occasions in the past where sentiment indicators for Paypal were strong and historically, this led to a median increase in price.
Friday marked opening night for San Jose’s PayPal park, a massive holiday light maze constructed with more than 4 million Christmas lights.
Learn more about TOGGLE AI and its awesome arsenal of tools at our weekly orientation sessions or reach out at support@toggle.ai.
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Originally Posted November 29, 2022 – A mega margin call?
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Disclosure: Margin Trading
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