On a very high level, Feds expand the balance sheet and give money to the banks. Banks loan out that cash as cheap margin to hedge funds, institutions, family offices ect... who can then up their stock positions with the margin, which pushes the markets up.
Here is margin debt vs the NYSE index, which is generally more encompassing of market health than the SPX. The relationship is pretty clear between the two.
This is where things get a bit concerning.. In the past when the YoY% change of margin debt peaks, then starts to decline, it has led to some pretty serious market events, especially in 2000 and 2007. As of now, a signal from this model looks imminent.
But... as we all know very well, it's extremely hard to call the top of a market.
For example, when you look at a shorter term view of margin debt, like the 8-month percent change.. That signal hit weeks ago and we're still printing new highs.
So is a collapse imminent in the future? Absolutely.
Is this model going to be the one to call it? Well... maybe... but who really knows. Even now that the rate hike discussion has started, the fed is staying extremely accommodative. At least in the near-term, that seems pretty bullish to me.
What do you guys think??
Bonus chart per @Raoul Pal . Hard to say the markets have even gone up at all over the decade+ when you account for the Fed BS... (More)