The One Chart that can Tell if a Market Crash is Coming

1 December 2018

If one were asked to select such a chart that can show if a Market Crash is coming,  which chart would you have chosen ?  Most likely,  the pick will be the chart that shows “Investors' Margin Debt”. 

Why ?

Individual and Institutional investors often borrow margin loans from their investment banks or stock brokers (Brokers) to back against their investment portfolios because margin loans have very high leverage;  for example,  one could controla $100,000 investment position with just $1,000 set aside in his account;  hence, many investors,  especially the Hedge Funds use this leverage to maintain and deliver their returns so as to justify their higher fees.

However,  this high leverage will attract a “margin call” which the Brokers will ask the investors to "top up" their account if  their account balances cannot cover the possible losses due to changes in market prices.   If such a margin call should occur, the opened positions may be forcefully closed by the Broker at very low market price.   As a result,  the investors could suffer huge financial losses.   So most margin investors will quickly react and  liquidate their positions all at about the same time and as soon as possible should they feel the  market pressure.   The investors' total margin debts or loans could "collapse" in matters of days when there is a “market avalanche”.  Its movement is very sensitive to a market crash and therefore,  can be used to monitor a market crash.

Example ?

Take the above chart for example.  The chart  shows the US Investors' margin debts or margin loans since 1995 as reported by FINRA,  the US Financial Industry Regulatory Authority.  In year 2000,  about USD$ 100 billions margin loans "disappeared" within 3 months and in 2008,  a total of about USD$75 billions just "evaporated" within weeks.  It was reported that one guy lost about  €1.6-billion margin loan within just a single day on December 6,  2008. 

Is This Going to Happen Soon?

Don’t think anyone would have the answer but it was reported on 21 November, 2018 that the US market suffered a “Lehman Style Plunge” in October 2018 where USD$40.5 billion margin loans have just "evaporated" in the thin air.    However,   there was no report yet about any individual losing huge amount of money.

Whether this sudden plunge will trigger a market avalanche will be anyone’s guess.  Nonetheless,  it is always good to monitor “ the US Investors' Margin Debt” for the possibility of a market crash and the Margin Debt Charts or Statistics could be used to monitor this situation.  

How to Monitor?

The “US Investors' Margin Debt” can be obtained from the following sources.  Should one see a similar pattern where investors are "losing huge amount of Margin Debts" in a single month,  one should take "cover" as soon as possible.

1.  Chart

https://www.advisorperspectives.com/dshort/updates/margin-debt

2.  Statistic

https://www.finra.org/investors/margin-statistics

Disclaimer:  This article is for information and  educational purposes.   Readers are advised to  conduct their own research and study to make their  own investment decisions.

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