Looking at the stock market peak in 2021 vs. today
In December 2021, less than a month before the S&P 500’s all-time high, New York Stock Exchange margin debt hit a record high of more than $700 billion.
In other words, investors were borrowing like crazy to own stock — just when they should have been cutting back.
Here in the early autumn of 2023, let’s look at the ratio of margin debt to free credit balances via this chart and commentary from the just-published October Global Market Perspective, the most comprehensive Elliott wave report in the world, published continuously for 32 years:
This ratio is critical because it shows how much (or currently, how little) cash customers who borrow to buy stocks have on hand to handle margin calls. The ratio of debt to available cash stretched to a high of 4.67 in October 2021… In July 2023, the ratio hit a new all-time high of 4.8… The editor of the Universal Cycle Theory Financial Newsletter says, “With minimal collateral supporting existing margin loans, the slightest decline in equity prices will soon spiral into uncontrollable selling.”
The stock market optimism which prompted this borrowing to buy stocks with such little collateral is running up against a seasonally unfriendly time for the market.
As you’re probably aware, historically, most of the market’s biggest declines occurred in September or October. And, so far this year, the same script seems to be playing out. As The New York Times notes (Sept. 29):
The S&P 500 declined almost 5 percent in September, its steepest monthly drop in 2023, and extending a more modest loss recorded in August… The index also notched its fourth straight week of losses, its longest losing streak of the year.
Of course, it’s always possible that the remainder of October defies the seasonal tendency of downward stock market action.
But it may not be wise to bet on it.
Elliott Wave International’s commentary on the Elliott wave pattern of global stock indexes will give you the insights that you need to know.
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