Why You Shouldn’t Stop Freaking Out About Margin Debt

Daily Chart June 3 InvestWithAlex

6/3/2015 – A positive day with the Dow Jones up 66 points (+0.37%) and the Nasdaq up 23 points (+0.46%) 

Quite a few interesting things out there today. A few days ago I displayed this chart of skyrocketing margin debt and why it is yet another bearish indicator. That is to say, most investors are extremely bullish at the precise moment when they shouldn’t be.

Margin Debt Investwithalex

Not everyone agrees with my assessment above. Traders are borrowing tons of money to bet on stocks … and it’s just not a big deal

Margin debt does not, by any statistical measure, lead equity prices. They are, essentially by definition, coincident. As stock prices move higher, outstanding margin debt does as well. If and when stock prices move lower, margin debt will follow.”

While I would have to agree with the statement above, they are looking at the wrong metric. It’s not the fact that margin debt moves in tandem with the stock market, it is the fact this metric is now 33% higher than at 2000 and 2007 tops. All while the stock market hasn’t gone anywhere over the last 10 months. In other words, the market is storing a tremendous amount of fuel for a correction. And given how much margin debt is out there, any such correction can very quickly turn into a violent sell-off.

Further, I would have to agree with the following sentiment. The stock market is becoming a ‘lose-lose’ situation

Investors are in the grip of “Stockholm syndrome” because there is a trust that central bankers don’t want to hurt markets, which more or less forces investors to maintain a “risk-on” positioning, buying things like stocks and lower-rated bonds.

I couldn’t agree more. I continue to maintain that this is the worst trade out there today. The problem is, everyone is in it. By the time most investors realize the FED is not in control and cannot backstop the market, it will be too late. At least 50% of the down move will be over by that point. Oh well….

This conclusion is further supported by my mathematical and timing work. It clearly shows a severe bear market between 2015-2017. In fact, when it starts it will very quickly retrace most of the gains accrued over the last few years.  If you would be interested in learning when the bear market of 2015-2017 will start (to the day) and its internal composition, please CLICK HERE.

(***Please Note: A bear market might have started already, I am simply not disclosing this information. Due to my obligations to my Subscribers I am unable to provide you with more exact forecasts. In fact, I am being “Wishy Washy” at best with my FREE daily updates here. If you would be interested in exact forecasts, dates, times and precise daily coverage, please Click Here). Daily Stock Market Update. June 3rd, 2015  InvestWithAlex.com

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