Technically Speaking: Margin Debt Confirms Market Exuberance

During the past couple of weeks, I have discussed the rising levels of bullishness in the markets. We have pointed to indicators like extreme investor positioning, put/call ratios, etc. However, the current surge in margin debt also confirms market exuberance.

First, we have to step back a bit. We previously discussed why the 35% decline in March was only a “correction” and not a “bear market.” As noted in “March Was Only A Correction,” there is a significant difference.

“The distinction is essential.

  • ‘Corrections’ generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
  • ‘Bear Markets’ tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

Using monthly closing data, the “correction” in March was unusually swift but did not break the long-term bullish trend. Such suggests the bull market that began in 2009 is still intact as long as the monthly trend line holds.

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margin debt market exuberance, Technically Speaking: Margin Debt Confirms Market Exuberance

Margin debt also confirms the correction and the recent exuberance.

 

Everything Is At An All-Time High

Before we dig further into what margin debt tells us, let’s begin with where we are currently. Greg Feirman recently summed it up nicely.

“Friday was an absolute breakout to new ATHs-fest (All-Time Highs). The S&P closed at a new all-time high just below 3,700. The Russell tacked on another 2.37% and closed just below 1900. Junk bonds and regional banks are super strong. Of course, if the indexes are breaking out, so are a lot of individual stocks.”

He is correct. As we discussed in “Sign, Sign, Everywhere A Sign,” investors are now “all in” in terms of portfolio risk.

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margin debt market exuberance, Technically Speaking: Margin Debt Confirms Market Exuberance

As Howard Marks noted in a recent Bloomberg interview:

“Fear of missing out has taken over from the fear of losing money. If people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s where we are now. That’s what the Fed engineered by putting rates at zero.

“,,,we are back to where we were a year ago—uncertainty, prospective returns that are even lower than they were a year ago, and higher asset prices than a year ago. People are back to having to take on more risk to get return. At Oaktree, we are back to a cautious approach. This is not the kind of environment in which you would be buying with both hands.

The prospective returns are low on everything.”

The Issue Of Margin Debt

This exuberance requires “fuel,” which brings us to margin debt. As I explained previously:

“Margin debt is not a technical indicator for trading markets. What margin debt represents is the amount of speculation that is occurring in the market. In other words, margin debt is the ‘gasoline,’ which drives markets higher as the leverage provides for the additional purchasing power of assets. However, ‘leverage’ also works in reverse as it supplies the accelerant for more significant declines as lenders ‘force’ the sale of assets to cover credit lines without regard to the borrower’s position.”

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