Stocks In Nosebleed Territory – Speculative Frenzy

Having been in this business for over 40 years, I learned early-on that markets can go a lot higher (or lower) than professional forecasters expect. And some trends can last much longer than anyone anticipated, especially if the government and/or the Fed is underwriting them – as is the case with both today.

With that in mind, does anyone but me have the feeling this runaway bull market in stocks may be in its final thrust? After all, this is the longest and strongest bull market in history, and we’re seeing new record high after new record high. Could this market be approaching what professional traders call “terminal exhaustion” at long last? I’m seriously wondering.

There are numerous indicators professionals watch to gauge whether markets are approaching a major top or bottom. One of those indicators is how much new money is pouring into the market (or leaving it). On that note, investors added more money to stocks in February than in any month on record.

As one example, investors added a record $86 billion to Exchange Traded Funds (ETFs) in February alone. Analysts attribute this surge in new money to the fact that Treasury yields have spiked this year, and investors are bailing on the bond market, opting for stocks instead. Whatever the reason, stocks are clearly “overbought” at this point, as you see in the chart above. Yet the overbought conditions and the flood of new money are just two concerns.

Another concern is the fact that stock margin debt has skyrocketed to new highs in recent months. Margin debt is money investors borrow from their brokers via a “margin account.” Margin debt can be money borrowed to buy securities or sell stocks short. The typical margin limit at most brokers is 25% of the account, but it can sometimes be higher.

As you can see in the chart below, margin debt has exploded in the last year, despite the COVID-19 recession in 2020. This is unusual. Normally, margin debt spikes before recessions occur, as you can see in 2000 and late 2007. This time is different.

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William K. 1 month ago Member's comment

The big challenge to geting rich in a bull market is knowing when the cloud of buyers waiting to be fleeced will dry up and vanish, and selling ones shares to them just before that happens. Predicting the inadequarely predictable with enough accuracy probably requires a great deal of luck,and sometimes that luck is misunderstood and presumed to finally be the gift of great insight.

So the larger challenge is to understand when one has been very lucky, and to not presume that one has gained the ultimate insight instead.