COTW: Margin Debt Tells the Story

 This chart from WolfStreet.com tells US what is going on in the stock markets right now:

Margin debt, which traders use to purchase stocks on credit, is in steep decline, and is a reliable indicator of market leverage.  No one knows the true extent of debt used to play the Big Casino since only margin debt is reported to FINRA, which gets the data from registered brokers.  Over the past six months it has dropped by 17%. Not even the banks and brokerages that provide the speculative capital know who much leverage is being used.  The collapse of the hedge fund Archegos Capital Management in 2021, which burnt billions in capital, proved that.  Credit Suisse, among the big Wall Street names, alone lost $5.5 billion

What the steep increases and decreases presage is market movements.  Steep increases in margin debt precede significant market sell-offs.  Traders buy more stocks on margin to get in on the rise in prices.  Margin debt declines during the sell-offs as speculators under pressure sell their holdings to satisfy margin calls.  The selling only feeds the market's decline in prices.  The second chart shows this relationship over time:

Recently as margin debt declined 17%, the NASDAQ, home to many speculative stock in tech and e-commerce, has dropped 27%.  It is just the tip of the iceberg--more unwinding to come.