Margin and SPX option gambling

Continuing the discussion from Open discussion: why does the market seem so relentlessly bullish?:

Thank you to @luxmain for posting this insight showing


I have noted before that the correlation of margin debt and the SPX is very close. So let’s look at margin debt.

Margin debt dropped from over $900 billion at the end of 2021 to about $650 billion at the end of October 2022. As interest rates rise, margin costs more.

In a market drop, stock owners who are long on margin get margin calls and may be forced to sell the good along with the bad. My grandmother warned me about this many decades ago.

The combination of short-term option gambling, margin and rising interest rates may cause increased volatility and sudden market drops.

Right now, the VIX is moderate (slightly elevated by pre-Covid standards). The spikes in mid-2022 might have been caused by short-term speculation coupled with margin.

A chartist might say “buy the dips” if not for the pattern of lower highs and lower lows coupled with the Macroeconomic fundamental of an approaching recession.