What is the contrarian sentiment indicator telling us?

The year-over-year percentage change in margin debt can help flag major tops in bull markets. This contrarian sentiment indicator will exceed 55% when optimism runs rampant on Wall Street and investors are heavily borrowing money during the late stages of a bull market.

While the current level does not indicate an imminent crash, exercising some caution in the quarters ahead might be warranted underpinned by high selectivity and distributional behavior within global markets. As leverage and bullishness increase, the year-over-year change in margin-debt might rise above 55%. Once this threshold is exceeded, it is warranted to watch for a decline of the indicator as this signals that margin calls are being triggered and a (significant) deleveraging process has begun.

Therefore, at Tramondo we believe in adaptive strategies and adjust the sails accordingly over the course of the cycle.