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Possibly the Most Important Chart of the Last Six Years

This very well may turn out to be one of the most important indicators to be watching over the next several months as we are reaching new stock market highs. Credit to Mebane Faber for highlighting this chart and ultimate credit goes to Riccardo Ronco with Aviate Global for creating the chart below:

Note how the three peaks of the S&P 500 correspond to the three peaks in net margin usage (represented by the bottom chart and the three yellow-highlighted "valleys"). We have nearly reached the same level of margin debt usage as we reached back in 2007 and 2000, which corresponded with peaks in stock market prices and preceded massive market sell-offs. We have already exceeded the levels we reached in 2011 during the last big correction.

That is not to say that margin borrowing cannot go higher and that stocks have to turn at this juncture, but the pattern is clearly unsustainable and tends to cycle from excess to pullback and peak to valley. This is a major red flag in the midst of the recent euphoria over new stock market highs. We recommend a defensive posture at this time.

Written By: Joshua Ungerecht

Debt, deleveraging, Net Margin Debt, Recommended Reading, S&P 500, Stock Market, technical analysis