Wed, Jan 8, 2014

Successful Investment In Stock Market

It always hits new highs market tops.

Right now it’s the highest it has ever been.

It’s higher than it was before the dot-com bubble collapsed and stocks dropped more than 30%.

It’s higher than it was when the housing bubble collapsed and stocks dropped more than 50%.

But is a stock market crash really imminent?

The data tells a much different story than most analysts are reporting.

I’m talking about the current levels of margin debt held in the market.

Margin debt is accrued when investors borrow money from their brokers to buy stocks. This is often called “buying on the margin.”

Margin debts are higher when good investors are confident because it allows them to buy (on average) twice as much stock than they normally would be able to do. This way they profit twice as much when their stocks go up.

Inversely, margin debt drops when good investors are fearful. They don’t want the leverage in what they think is a bad market.

As a result, record margin debt levels would seemingly coincide with a period extreme confidence. Which, as contrarian investors know, confidence tends to peak right before the market declines.

So it makes sense a lot of good investors get worried when margin debt levels are high.

But here’s the thing they don’t understand. There’s a much more important factor that comes for margin debts than just the level.

This chart from the NYSE shows how margin debt has reached new highs shows this more important factor:

The factor I’m talking about is changes in margin debt levels, not the levels themselves.

The chart shows that margin debts peaked in early 2000 and early 2007.

The market downturns which followed did not follow immediately. Not at all.

In both cases it the markets continue to rise.

That’s why we recommend watching margin debt levels and whether they’re rising or falling.

Don’t get me wrong, record margin debt levels make great headlines. They can spook a lot of good investors easily.

The changes in margin debt levels, however, are what precede a market decline, not the nominal margin debt levels.

Take the contrarian investment rout and always let the data guide your investment decisions. You’ll be a much more successful investor