Margin debt at NYSE firms peaked in July 2007 at $381.4 billion, a 41 percent increase from the level in November 2006. The S&P 500 reached its record high of 1,565.15 on Oct. 9, 2007, then tumbled 57 percent through March 2009. Margin debt climbed to its previous high of $278.5 billion in March 2000. The S&P 500 also peaked at a record that month before entering a bear market in which it lost 49 percent through October 2002, data compiled by Bloomberg show.

"The high this year was within two weeks of this number, so it does tell us something," Mike Shea, a managing partner and trader at Direct Access Partners LLC in New York, said in an Aug. 9 telephone interview. "Smart money started selling the market at its high and taking risk off the table, and the market chopped along a little more for June and July before following through to the downside."
Still Bullish

Institutional investors expect leverage to decrease this year. Seventy-eight percent of investment managers said hedge funds will use "significantly less leverage now than prior to the 2008 credit crisis," up from 70 percent a year earlier, according to an April report by Rothstein Kass, a Roseland, New Jersey-based adviser to alternative investment companies.

To Laszlo Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut, investor sentiment eroded because of the debate over raising the debt ceiling and the decline of the past 15 days has gone too far because earnings are still rising. S&P 500 profits may increase 17 percent to $99.24 a share in 2011 and 14 percent to $113.11 in 2012, analyst estimates show.11

"While this is painful to me, it's just a correction, it's being saturated by political circumstances and unfortunately political circumstances create emotion and emotion creates volatility," Birinyi, one of the first investors to recommend buying when the bull market began in March 2009, said in an Aug. 12 Bloomberg Television interview. "But I think the market situation is much more reminiscent of a 10 percent decline, not too dissimilar from what we had last May and June. I'm not of the belief that the bull market is over."
European Crisis

Artemis Wealth Advisors LLC's Peter Rup said the decline in margin shows professional investors are protecting clients' money, not bailing out of stocks. The S&P 500 will rally because companies have record capital and earnings are growing, he said.

Margin debt fell by a similar amount in April through June 2010 as concern rose the European debt crisis would spread and the S&P 500 tumbled 16 percent between April and July. The index reversed itself and gained as much as 30 percent after Fed Chairman Ben S. Bernanke signaled Aug. 27 that the central bank would buy Treasury bonds to stimulate the economy and boost asset prices.
Chemtura, Valeant

"It could be an indicator of participation in the market and capital preservation, people just don't want the risk," Rup, chief investment officer at the New York-based firm that invests in hedge funds on behalf of clients, said in an Aug. 10 telephone interview. "Once this fear subsides, I would expect the equity market to very rapidly recoup all of its losses."

Hedge fund managers sold a net 3.68 million shares of Chemtura, the Philadelphia-based maker of specialty and farm chemicals, last quarter, according to regulatory filings compiled by Bloomberg. The stock is down 24 percent in the past three weeks. They sold 5.9 million shares of Mississauga, Ontario-based Valeant Pharmaceuticals International Inc. (VRX), which has dropped the second-most among the 51 companies in a Goldman Sachs Group Inc. index of stocks with the biggest hedge fund ownership.

Analysts are starting to revisit earnings estimates for banks after the Fed said last week the economy is slowing more than it anticipated. Charlotte, North Carolina-based Bank of America had its earnings estimates cut last week by International Strategy & Investment Group Inc., which predicted a "revenue recession" for lenders.
Selling Stock