“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.
Chinese Investors Are Rushing into Gold. Should You?
The wild card for the global markets remains China. You've heard about its real estate problems; now the yuan is on the rocks. Here's our monthly Global Market Perspective contributor, Mark Galasiewski, with a handy chart and a few under-the-radar highlights from the October issue to give you a unique perspective on the situation.
European Stocks: “Deeper and Deeper”
October is almost here, and so far, "things are quiet" in the markets, says our monthly Global Market Perspective contributor Brian Whitmer. But watch as he lists a few items on his radar as he gives you highlights from the new, October issue.
Another Way to Measure (and Predict) Volatility
Volatility has reigned on Wall Street this month. One way to measure and predict it is by looking at the difference, or "spread," between the "fear index" VIX and junk bonds. Here's our Head of Global Strategy, Murray Gunn, showing you an interesting chart in a preview of our new, October Global Market Perspective.
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