Margin Debt Shrinks 9.3% in December

In what some analysts take as a potentially bullish sign for the stock market, margin debt--credit used to buy stocks--shrank by 9.3% in December, continuing the decline that began last spring after Nasdaq reached its peak.

Margin debt in customer accounts of New York Stock Exchange member brokerages fell to $198.8 billion last month, the New York Stock Exchange said Wednesday. It was the third straight monthly drop and the first time since October 1999 that margin had dipped below $200 billion.

The latest total is 29% below March’s record of $278.5 billion, which coincided with the peak in tech stocks.

The Nasdaq composite index and the margin debt level have roughly tracked each other, analysts say, because at the height of the stock market frenzy the bulk of the speculation--and margin borrowing--were focused on tech shares.

Yet the drop in margin levels is bullish, because it means that speculative fever is cooling even as tech shares and the broad market are starting to recover, said Charles Biderman, president of Liquidity Trim Tabs, a Santa Rosa, Calif.-based market research firm.

“The bottom is reached when margin debt falls faster than the market,” Biderman said, because that suggests more investors are on the sidelines, waiting to get back into the market, instead of already being in it.

The Nasdaq composite index fell 4.9% in December while margin levels fell 9.3%.

By another measure--margin debt as a percentage of total stock-market capitalization--speculation has eased considerably. In March, margin debt reached a record 2.3% of market capitalization. In December, it had fallen to 1.6%, said Philip R. Roth, chief technical strategist at Morgan Stanley Dean Witter in New York.

The margin-to-market-cap ratio at the end of 1994, which Roth considers the start of the bull market’s latest and biggest leg, was 1.37%.

“Not all of the speculation has been wrung out,” he said.