Here’s a Startling Update on Investors’ Use of Stock Market Leverage
Here in 2021, this occurred for the first time in history
by Bob Stokes
Updated: May 27, 2021
The topic of stock market leverage has been discussed more than once in these pages, and now it's time for a stunning update.
Our May Elliott Wave Financial Forecast provides the details with this chart and commentary:
The bottom graph on the chart shows the Rydex Total Leveraged Bull/Bear Ratio, which divides the total amount of assets invested in Rydex funds that are leveraged long the S&P 500 and NASDAQ 100 indexes by the total amount invested in leveraged short funds for the same indexes. In January, for the first time in history, long side holdings hit 50 times short side holdings. In April, the ratio made its first extended trip above 50, rising to an all-time high of 57.3 times on April 23.
Mind you, the Rydex leverage splurge is only one way that investors are expressing a high degree of confidence in risk assets.
One of the other ways is the use of margin debt.
As a May 2 Wall Street Journal article noted:
Individual investors are holding more stocks than ever before as major indexes climb to fresh highs. They are also upping the ante by borrowing to magnify their bets or increasingly buying on small dips in the market. [emphasis added]
Of course, the big risk of "going long" the market with borrowed money is that losses are amplified during a downturn.
Plus, keep in mind that the emotion of fear in a bear market tends to drive prices a lot faster than the emotion of hope during a bull market.
So, not only are losses amplified; in some cases, it's probable that they will be amplified rapidly.
The degree of investors' use of borrowed money is certainly a red flag, yet -- it's not a precise market timing indicator.
However, the Elliott wave model is useful in identifying market turns.
As Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior, says:
The ability to identify such junctures is remarkable enough, but the Wave Principle is the only method of analysis that also provides guidelines for forecasting. Many of these guidelines are specific and can occasionally yield stunningly precise results.
Now is the time to learn what the Wave Principle suggests is next for U.S. stocks.
Get started by following the link below.
The Patterns of Investor Psychology Never Change
The patterns of investor psychology are endogenously regulated -- which correctly implies that no "outside" event changes these patterns.
Specifically, even major news or events like a presidential election, a terrorist attack, an earthquake, and yes, a pandemic -- do not alter the stock market's internally regulated pattern. Not even a world war.
As Frost & Prechter's book, Elliott Wave Principle, says:
Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news.
Additionally, Elliott wave patterns are repetitive, hence, they have predictive value.
Learn what the stock market's Elliott wave pattern strongly suggests is next for U.S. stock prices by following the link below.
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.