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Margin Debt is Fueling the Market Rally
Investors ignore the sign posts at their peril

By Bob Stokes
Fri, 01 Feb 2013 15:00:00 ET
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Margin debt is fueling the market rally, and the investors behind the wheel have no fear. 

Consider the Risk Aversion Index. In the January Elliott Wave Theorist, Bob Prechter comments on this measure of investor sentiment.
By this composite measure, investors are more complacent than they were at the 1987 top, just before the biggest crash since 1929; the 2000 top, which in real terms has never been exceeded; and the 2006-2008 top, when real estate, stocks and commodities all registered their all-time highs in nominal terms.
Since the issue was published, bullish stock market predictions have been as numerous as warnings about global warming at an environmentalist conference.
One of the latest examples (CNBC, Jan. 31) expresses the view of a well-known college professor:
Dow Will 'Definitely' Top 15K This Year
Also since the January Theorist noted the extreme market complacency, the Dow Industrials turned in a positive January performance for the third consecutive year. The senior index "gained 5.9% in January, making it the best performance for that month since 1994," says CNNMoney (Jan. 31).
An optimistic market psychology is in the driver's seat, and with the use of margin debt at multi-year highs, it's been full speed ahead.
Prechter describes an observation from early in his career.
The bulls are not only complacent but also leveraged. ZeroHedge just posted a chart of margin debt, reproduced [below]. Observe that margin debt peaked in the summer of 2007, bottomed with stocks in early 2009, and is nearly back to its 2007 high. In the 1970s, I used to keep Merrill Lynch’s internal figures on buying and selling in cash accounts vs. margin accounts. Those were exceptionally valuable data, like the odd-lot figures of old. In watching the money flows, I could see that cash accounts bought and sold values, while margin accounts bought and sold with the trend. Clearly margin borrowing has once again helped fuel a rally.
Elliott Wave Theorist, January 2013
Prechter also mentions the flip side of margin debt.
Moreover, he elaborates on three additional measures of market sentiment and gives subscribers a specific and bold stock market forecast for the next 3-1/2 years.
Dear reader, investors may face the most significant market juncture of the past three centuries.


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