"In the last 25 years, NYSE Margin Debt as a % of GDP peaked just prior to major market tops in the S&P 500. If margin is increasing, then the S&P will likely be rising as that new margin money is being invested in the stock market. On the flip side, declining margin debt reflects investors closing out levered equity positions thereby reducing balances of borrowed money. This can be self-perpetuating - the more investors sell, the lower prices go. The lower prices go, the more margin calls will be made thus forcing more selling...and the cycle repeats. That's why it's so important to equity markets that margin debt keeps growing. It's a constant influx of new money that pushes up prices."
With October's data in the books, we've now seen 8 consecutive months of sideways-to-down margin debt as a percentage of GDP. While this data series has churned sideways, the S&P has continued to roar ahead to new highs, seemingly content to ignore its historical relationship with margin. As I say above, however, margin debt as a percentage of GDP tends to peak just prior to major market tops. That first graph certainly looks like it's rolling over which would imply the S&P is about to get a serious dose of reality.