Bubble Talk: What High Margin Debt, Low Cash Levels Mean for Stocks

 NEW YORK (TheStreet) -- High margin debt and low levels of cash may mean that the stock market will pop at any time.

The New York Stock Exchange measure of margin debt set an all-time high of $466 billion in February, and the latest reading is $460 billion for July. Meanwhile, the American Association on Individual Investors Asset Allocation Survey shows that the level of cash was at a 14-year low at 16% in August.

The NYSE measure of margin debt has tracked the ups and downs of the stock market very well. The chart below sends a clear message -- margin debt rises with the S&P 500 and declines with the S&P 500. If margin debt starts to decline, so should the S&P 500.  


Let's take a look at the daily chart for the S&P 500:

  Courtesy of MetaStock Xenith

The daily chart for the S&P 500 shows the index below its 21-day simple moving average at 1990.76 with declining 12x3x3 daily slow stochastics after setting an all-time intraday high at 2011.17 on Sept. 4. The 50-day and 200-day simple moving averages are 1972.59 and 1888.04, respectively.

In my last post covering the S&P 500 on Sept. 27, the daily chart was positive but overbought with a close just above 2000 for the first time ever.

At the beginning of the year, I predicted that all major averages would at least weaken to tests of their 200-day simple moving averages. The Dow Jones Industrial Average traded as low as 15340.69 on Feb. 5, which was below its 200-day then at 15478.54. Today the average is 17010. The Russell 2000 has been trading back and forth around its 200-day April 15 with the average now at 1147.

Let's take a look at the weekly chart for the S&P 500.


Courtesy of MetaStock Xenith

The weekly chart of the S&P 500 is positive but overbought with its five-week modified moving average at 1976.19. The green line on this graph is the 200-week simple moving average, which was last tested at 1142.81 in October 2011. This average is at 1974, as the long-term reversion to the mean.

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The S&P 500 peaked in March 2000 in a bear market than bottomed between July and October 2002. The bull market from the October 2002 low peaked at 1576 in October 2007.

With the crash of 2008, the S&P 500 bottomed at 666.8 in March 2009. The bull market bubble began to inflate when the S&P 500 broke out above the 200-week SMA in October 2011. The S&P 500 has been without a correction since October 2011.

The close in August was 2003.4, resulting in a monthly value level of 1978.2. A weekly close below 1978.2 indicates risk to a semiannual value level of 1789.3.

Given increased volatility, annual value levels lag at 1539.1 and 1442.1, respectively, with quarterly and semiannual risky levels at 2052.3 and 2080.3, respectively.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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