Charles Lewis Sizemore, CFA

About the Author Charles Lewis Sizemore, CFA

Charles Lewis Sizemore, CFA is the founder and principal of Sizemore Capital Management LLC, a registered investment advisor. Charles has been a repeat guest on CNBC, Bloomberg TV and Fox Business News, and has been quoted in Barron’s Magazine, The Wall Street Journal and The Washington Post. He is a contributor to Forbes Moneybuilder, and has been featured in numerous publications and well-reputed financial websites, including MarketWatch, SmarterAnalyst, TheStreet.com, InvestorPlace, GuruFocus, MSN Money, and Seeking Alpha. He is also the co-author, along with Douglas C. Robinson, of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy (iUniverse, 2008). Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. He also maintains the Chartered Financial Analyst (CFA) designation in good standing.

Investor Margin Debt: Is This Really the Most Hated Bull Market in History?

 

The current bull market, which started in early 2009, has been called “the most hated bull market in history.” It seems investors have been waiting in vain for that other shoe to drop only to see the market march higher with nary a correction.

Stocks climb a proverbial wall of worry, and negative sentiment among rank-and-file investors is actually a contrarian bullish sign. It is when sentiment gets one-sidedly bullish and investors throw caution to the wind that you know a major top is near.

But with the S&P 500 now sitting near all-time highs… and tripling in value from its 2009 crisis lows… is it really fair to call this rally “hated”?

Let’s take a look at investor trading on margin. When investors are feeling bullish, they are a lot more likely to trade aggressively… and to borrow money to do it.

chart

As you can see in the chart, investor margin debt as a percentage of market cap does indeed tend to surge leading into a major market top and tends to fall dramatically during a market decline. We saw investor margin debt jump from less than 1% of market cap to nearly 2% during the great 1990s tech bubble. And it had another major spike during the bull market of the mid 2000s.

Today, we certainly don’t see a lot of investor enthusiasm for margin trading, and margin debt is actually trending lower. We’re still at levels that are high by historical standards, but much of this can be explained by two factors:

  1. Ease of margin trading with discount online brokers
  2. Falling interest rates over the past 30 years…and particularly over the past 6 years.

Remember, the Fed has kept short-term lending rates at close to zero for six years now, so it’s natural that investors will borrow more aggressively on margin. “Free money” makes carry trades that wouldn’t be profitable under “normal” conditions worth doing. Seen in this context, today’s margin debt levels are far less impressive and certainly far less indicative of investor enthusiasm.

So, at least by this metric, our bull market today really is unloved, at least by the standards of recent major tops.