BofA: NYSE Margin Debt Is Generating A Sell Signal We Haven't Seen In Three Years

We've noted that margin debt at the NYSE has been rising steadily as stocks have advanced in recent months. Like the stock market, total margin is close to all-time highs.

BofA Merrill Lynch technical analyst Mary Ann Bartels writes in a note to clients that cash balances in those margin accounts have fallen to such a low level that they are now generating a sell signal not seen in three years.

Here is Bartels:

Net Free Credits from the NYSE Margin Debt data shown in the chart below is essentially a measure of cash levels in margin accounts. Current levels have fallen to levels that have generated a tactical sell signal based on a 2-standard deviation Z-Score reading.

The last time a sell signal was generated was on April 2010 and the S&P 500 subsequently corrected by 16% in two months. Net free credits for January were at a negative $77.2 million or cash balances are negative and the Z-Score indicates the cash draw down has been excessive. So a contrarian sell signal is given.

Cash balances are plotted as black bars on the bottom graph in the chart below (click to enlarge).