Wolf Street: Margin Debt Unwinds Further Amid Massacre of High-Flying Stocks and Forced Selling

Article by Wolf Richter in Wolf Street

Margin debt – the visible tip of the iceberg of the direction of overall stock-market leverage – dropped by $20 billion in May from April, to $753 billion, according to Finra, based on reports from its member brokers. Margin debt had peaked in October 2021 at $936 billion, and began to decline in November 2021.

The Nasdaq peaked in mid-November as margin debt began to unwind and has since plunged 33%. The S&P 500 peaked on the first trading day in January, as margin debt was beginning to plunge. And the S&P 500 has since then dropped 22%.

In the seven months since the peak in October, margin debt has dropped by $183 billion, or by 20%, from the gigantic levels last year, an indicator of the turmoil in the market, but also an indicator that leverage is still extremely high and has a long way to go:

Sharp increases in margin debt are associated with increases in stock prices because leverage creates buying pressure with borrowed money.

But then the tables turn, and in a vicious mechanism that includes margin calls, major stock market events are associated with sharp declines in leverage. Margin debt can serve as an effective warning about issues in the stock market.

The absolute amount of leverage in the stock market, across all forms of leverage, is unknown and no one tracks it. Margin debt reported by brokers is the only form of stock market leverage that is tracked and reported on a monthly basis.

Margin debt and hype-and-hoopla stocks.

Brutal collapses of hype-and-hoopla stocks that get chopped down 80% or 90% in a matter of months trigger forced selling amid the margined crowd that was planning to get rich quick on those stocks and that therefore had concentrated holdings of these stocks. Hundreds of stocks have collapsed, starting in February 2021, and I’ve documented some of them in my Imploded Stocks.

Leveraged investors with a concentration in some stocks could get completely wiped out, with their brokerage account balance reduced to near nothing, if they didn’t dump these instruments in time.

Even some of the biggest stocks plunged far enough to have triggered forced selling among margined investors (percentages from their highs through June 14 mid-day):

• Netflix: -76%
• Amazon: -45%
• Tesla: -46%
• Meta: -57%
• Nvidia: -54%
• Salesforce: -47%
• Intel: -44%

Margin debt and stock market “events.”

I started warning about the spike in margin debt in January 2021, on the eve of the collapse of many of the above stocks that began in February 2021. And the warning was blown off.

What matters are the steep increases in margin debt before the selloffs, and the steep declines during the sell-offs. The absolute .......

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