“Fastest Jump Since 2007”: How Leveraged Investors are Courting “Doom”
“Our view is that the use of margin to buy stocks is far higher than the NYSE figures indicate”
by Bob Stokes
Updated: April 15, 2021
The stock market uptrend has extended for more than 11 years.
Even so, instead of displaying caution, investors have been borrowing to buy stocks like there's no such thing as a bear market.
For example, consider this chart and commentary from our March Elliott Wave Financial Forecast:
Alan M. Newman, editor of Crosscurrents (www.cross-currents.net), is a market veteran who has seen many bull and bear markets. He recently published this "startling" chart of what he calls Net Investment Liquidity, in which he subtracts total U.S. mutual fund cash from total New York Stock Exchange margin debt. [Newman said]: "We've seen a lot in 56 years of observation and this appears to be the riskiest environment in my lifetime."
Our April Elliott Wave Financial Forecast provided more coverage of margin debt by saying:
Margin debt as a percentage of U.S. disposable personal income hit 4.6% in February, well above the extremes of approximately 4% in 2000 and 2007. With "lopsided commitments" to leveraged long funds and all kinds of other arcane financial instruments, our view is that the use of margin to buy stocks is far higher than the NYSE figures indicate.
An April 9 Business Insider article offered this angle:
Margin debt saw an annual surge of 49% in February, which was the fastest jump since 2007...
Leverage is a double-edged sword for investors, as many take on the debt to buy more stocks. That is a winning strategy in a bull market, but a market correction can spell doom for investors who have too much leverage and need to sell equities or deposit more cash to meet margin calls, which can further exacerbate a downturn in stocks.
Financial history shows that bull markets usually reverse big-time just when confidence is at its zenith -- the precise moment to exact maximum damage on investors' stock portfolios.
Learn what the Elliott wave model suggests is next for the stock market by following the link below.
Stock Market Optimism Reaches an Epic Extreme
The financial optimism on display here in 2021 is nothing less than astounding.
Reflect on this (April 9, CNBC):
Investors have put more money into stocks in the last 5 months than the previous 12 years combined
Then, there's this market view from a well-known finance professor (Business Insider, April 8):
The stock market could soar 40% as the bull market enters its 3rd inning...
The 3rd inning... after stocks have been climbing for 11 years?
The professor could be right -- but then again, financial history shows that when optimism reaches an extreme, expect the pendulum to start swinging the other way sooner rather than later.
Elliott wave analysis helps you to anticipate the next big stock market move.
Follow the link below to get Elliott wave insights into the U.S. stock market now.
Commodity prices have taken a tumble during the past several days. A financial website says the decline is due to the "China crackdown" and "rising dollar." Yet, Elliott wave analysis foretold of the price drop when commodities were still rallying. Take a look at this chart.
See the Trader’s Classroom forecast and Elliott wave pattern that anticipated a rally which saw US Steel nearly double in price.
Ever heard of the acronym FOBI? It was coined here at Elliott Wave International and stands for the "fear of being in." Yes, just the opposite of the better-known acronym FOMO (fear of missing out). Here's an explanation.