Margin Debt: Another Bogeyman Slain

In 2009, they routinely trotted out charts of aggregate insider selling to show how corporate executives weren’t buying the relief rally and were getting out while the getting was good. Every day a new chart or blog post or newsletter written about the mass dumping of execs’ personal stock holdings. Fortunately, we learned that aggregate insider selling (or buying) is not an actual timing signal – for starters, just because you’re the COO of a public company, doesn’t mean you have any idea where the market will value your stock in 90 days or 9 years. Second, the higher stocks climb, the larger the dollar figures of sales will be – basic math. An insider selling 10,000 shares of Google stock at 450 will make a bigger splash in dollar terms than if he had sold that same 10,000 shares at 225.

Once that bogeyman had been slain here in the financial blogosphere, we were left to contend with the Baltic Dry Index obsession in 2010. Somehow, we were supposed to fret about the plunging rate of carrying dry goods around the world as though it had some major ramifications for stocks. It did not. Financial bloggers dispelled that myth by showing how the BDI was not just a measure of demand for the shipping of goods, but it was also a measure of actual shipping capacity as well. The availability of cargo ships was not a function of the economy but of long-term contracts and weather and seasonality and so forth. We blew that one up fairly quickly once the doomers began to seize on it.

In 2011, we were assailed by all manner of Death Crosses and Hindenburg Omens and other supposedly ominous patterns showing up on the stock charts. I won’t go into great deal about how ridiculous the commotion was over these nonsensical non-events. Suffice it to say, the same content-whores who were cranking out hysterical blog posts about the Hindenburg Omen would later move on to he Mayan end-of-the-world Calendar in 2012.

The latest and greatest thing that goes bump in the night around these parts is the NYSE brokerage account margin debt total. It’s being annihilated as an indicator as we speak, invalidating the hundreds of headline-driven stories designed for maximum angsty clickability.

Firstly, Deutsche Bank strategists remind us that margin debt always tracks alongside the market’s price levels, a concurrent indicator with no more predictive power than a glance at a wall clock:

NYSE Margin Debt At All-Time High: DB Puts It Into Perspective (ValueWalk)

And for a truly magnificent takedown of the margin debt meme, a once and for all prison-raping of the latest scare tactic, may I suggest the following minor masterpiece of debunkment:

Margin Debt: Move Along, Nothing to See Here (Philosophical Economics)

Here on the financial web, we take care of our own. We debunk the mythology as quickly as it can be created these days so that our civilian readers can go about their business and lives, safe in the knowledge that the less they pay attention to, the better off they’ll probably be.



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