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Stock Market Warning Signs: Another Record Month Shows $451.3 Billion of Debt Invested in the Market

By Blake Bos – Mar 8, 2014 at 8:30AM

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Are stock market investors setting themselves up for a record-breaking fall or is this market just starting to heat up?

The New York Stock Exchange recently updated its stock market margin-debt data, showing that Main Street and Wall Street are still continuing to dump billions in borrowed dollars into the stock market.

All data from the NYSE.

Borrowed money in the stock market, known as "margin debt," hit another all-time high of $451.3 billion in January, a 1.4% increase over the previous month. This puts margin debt, even adjusted for inflation, above levels seen during the housing bubble and highs set during the dot-com bubble.To put that into perspective, if this margin debt were a country's GDP, it would be the 30th-largest economy in the world, right below Taiwan's. 

What is this margin debt, exactly?
Margin debt is accrued when someone takes out a loan and invests that money into the stock market. Because of historically low interest rates, the appeal of margin debt is much greater today than in previous bull markets. Based on the attractiveness of low-interest debt, it's likely that margin debt will continue to race higher in today's market. Look for February data to further support this.

There's more to this story than just margin debt, though. The NYSE also reports what it calls "credit balances in margin accounts." This credit balance is the sum of money held to meet minimum margin requirements and money borrowed to short a stock. Looking at the data, we can see it appears the shorts have yet to pile into this latest bull market.

All data from the NYSE.

Credit balances as of January amounted to $165.3 billion and are 57% below the high set during he housing bubble of $385.8 billion. It appears we're within historic norms and market bears haven't begun to short the market in a big way like they did in 2008. Let's move on to one stock that could be benefiting from increased debt in the stock market.

One stock benefiting from the bull market
Green Mountain Coffee Roasters (GMCR.DL) been a prime benefactor of the recent bull market, rising 47% year to date, compared to the Dow Jones Industrial Average's (^DJI 0.41%) loss of 1.66%. This rally stems from the belief that the company's new at-home soda machine will provide the company with more growth opportunities and was really set into overdrive when Coca-Cola took a 10% equity stake in the company. Investors should keep an eye on the International Housewares Association show in Chicago March 15-18. The company could reveal the new maker there. 

What to look for
In the following video, Motley Fool analyst Blake Bos goes over the most recent margin-debt data, gives examples of how margin debt works in the market, and explains some of the dangerous pitfalls margin debt exposes investors to.

Blake Bos has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Green Mountain Coffee Roasters, owns shares of Coca-Cola, and has options on Coca-Cola. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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