Borrowing money to buy stocks adds buying pressure during a move up, but can be catastrophic on the way down. One of the worst phrases a trader will ever hear is ‘margin call’—when a broker demands more cash to cover a losing position or else have it forcibly liquidated. In down markets, these forced liquidations contribute to the crashes that often occur near bottoms. Adding to the alarm bells already ringing, margin debt for the overall market - the amount of money investors have borrowed to buy stocks - has ballooned over the past 20 months. Despite the slight downtick of $17 billion in November, margin debt remains at a gargantuan $918.6 billion. (Chart from wolfstreet.com)
Jeffrey Cerny