They don’t ring a bell at the top, the expression goes, but here’s an indicator that topped in 2000 and 2007.
It has to do with margin debt. According to Ned Davis, senior investment strategist at Ned Davis Research, falling margin debt growth, from high levels, triggers a sell warning. When the 15-month rate of change in margin debt falls below 48%, the market was lower three to 18 months later, on average.
Another warning sign is that price-to-earnings ratios on what the firm calls institutional grade stocks are stretched.
Yet Davis can’t quite bring himself to fully cloak himself in pessimism. Short-term sentiment is still negative, he points out, which usually is a good sign for markets.
“I would note however, that following any rally, a break of the December low is often a warning sign. So we will be watching the year-end rally closely,” he says. The S&P 500 touched its lowest level for the 12th month on Dec. 3, when it reached 4,495.12.
The chart
