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What Investor Risk Tolerance Today Suggests for Stocks Tomorrow

NYSE margin debt "generally waxes and wanes with the trend in stock prices"

by Bob Stokes
Updated: August 13, 2019

No one wants to lose money, but countless investors are willing to take that risk in order to reap the potential rewards of participating in financial markets, like stocks.

Sometimes though, these investors start to get nervous. Their risk-o-meter starts to move lower.

One way to measure investors' tolerance for risk is to look at the relative performance of various indexes.

A little history will provide an example: The KBW Bank Index made its all-time high in February 2007 -- well before the DJIA's October 2007 high. In January 2008, our Elliott Wave Financial Forecast noted that the KBW Bank Index's underperformance confirmed the presence of a...

"big turn from a full-steam-ahead, collective embrace of risk to a new mood of fear and risk aversion."

Boy, did that turn out to be the case with the worst of the 2007-2009 bear market still ahead at the time that issue of the Elliott Wave Financial Forecast published.

Let's now return to 2019 with an example of another way to gauge investors' risk tolerance.

The August Elliott Wave Financial Forecast showed this chart and said:


NYSE margin debt is another tried-and-true measure of risk tolerance. This measure generally waxes and wanes with the trend in stock prices. Although, as The Elliott Wave Theorist noted in 1980, declines in monthly margin debt in conjunction with an advancing market can be the "kiss of death" to a bull trend. The earlier that the margin debt contraction begins relative to a stock market rally, the more important the eventual market peak tends to be.... The chart shows [that] NYSE margin debt peaked at a record high of $669 billion in May 2018, 14 months ago.

The question is: How does the time length of this divergence stack up historically?

Well, the August Elliott Wave Financial Forecast provides you with that historical context. Suffice it to say that the length of the current divergence is rare.

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