Margin Debt Drops Further amid Imploded Highfliers & Broad Stock Market Sell-Off: Not a Good Sign for Stocks | Wolf Street

The S&P 500 peaked on January 3, followed by a sharp sell-off and has since declined 8.8%. In the month of January, margin debt dropped by $80 billion, or 8.8%, the largest dollar-drop ever, and one of the largest percentage-drops ever.

The stock market and margin debt are just about joined at their figurative hip. And drops in margin debt are associated with sharp declines in the stock market.

Not even banks and brokers that fund this leverage know how much total leverage there is, or even how much leverage their own client has, which was the case when the family office Archegos, a private hedge fund, blew up a year ago and caused billions of dollars in damage to the prime brokers that had provided the leverage. The amount of leverage Archegos had used didn’t emerge until it blew up and the brokers had to sort through the debris.

Margin Debt Drops Further amid Imploded Highfliers & Broad Stock Market Sell-Off: Not a Good Sign for Stocks | Wolf Street