Surge In Trading Leverage Triggers Bank Of America Contrarian Sell Signal

Leverage, as measured by NYSE Margin Debt, rose a huge 31.6% year-on-year (YOY) and 10.2% month-over-month (MOM) to $364bn in January, compared to the July 2007 peak of $381bn. Net Free Credits at -$77.2mm (essentially cash balances in margin accounts) have plunged to levels (and at a rate) that BofAML believes generates a sell signal and typically result in market correction. The last time a (2-standard-deviation) sell signal like this was generated was on April 2010 and the S&P 500 subsequently corrected by 16% in two months. While the US equity market has not responded to at or near overbought or contrarian bearish sentiment levels very recently (remaining overbought for weeks) BofAML also notes a tactical sell signal was just triggered that is similar to those from September 14 and April 27, 2012 – both preceded market pullbacks.

 

Margin Debt is soaring (as NYSE Cash balances collapse)...

 

at a rate that has trigger contrarian sell signals as its rapidity is a 2-standard-deviation rise...

 

Short-term Sentiment has also shifted bearish...

 

So if you were wondering where the 'money on the sidelines' is - it's all-in - again!

 

Charts: BofAML