Margin debt started dropping a month before the Nasdaq went south, and it’s still dropping.

The total amount of leverage in the stock market is unknown and takes many forms. The only form that is tracked and reported on a monthly basis is margin debt. The other forms, such as Securities Based Lending (SBL) and hedge funds leveraged at the institutional level are not tracked.

Not even banks and brokers that fund this leverage know how much total leverage their client has from all brokers combined, which became clear when the family office Archegos imploded in March 2021 and wiped out billions of dollars in capital at the prime brokers that had provided the leverage.

But margin debt – the tip of the iceberg and indicator of the direction of the overall stock market leverage – dropped by $27 billion in April from March, to $773 billion, according to Finra, which gets this data from its member brokers.

Margin debt peaked in October last year at $936 billion and started falling in November. Over those six months, it has dropped by $163 billion, or by 17%. But leverage is still massive, and the unwind has a long way to go:

These kinds of selloffs trigger big bouts of forced selling amid margined stock jockeys that have concentrated on these stocks.

Hundreds of stocks have plunged by very large amounts, by 70%, and 80%, and even over 90% in a replay of the beginnings of the Dotcom Bust

Leveraged investors in those instruments had to reduce their margin as their collateral values vanished into the ether, sometimes overnight

A margined investor that was heavily concentrated in these stocks and didn’t dump them in time could get wiped out and might be thinking about rejoining the labor force to help solve the labor shortages.

When lots of investors take on leverage to buy stocks, and leverage rises, it creates buying pressure with borrowed money, fueling heat in the market.

Margin debt and stock market “events"

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