When people cite things like the AAII poll or even institutional investors’s surveys, I click off the TV. Just kidding, it’s not on to begin with. But seriously, I don’t give a shit what people say they’re doing, I pay attention to what they’re actually doing.
The Sicilians say “Watch what they do, not what they say.” They also say Asini, donni e voi, nun t’alluntanari di li toi, or “Don’t go far away from your donkeys, women and oxen”. Which is fairly sexist, but we’ll worry about that later.
Anyway, let’s just acknowledge the fact that margin debt is reaching extreme levels and just think about it psychologically – we don’t have to have a debate about whether or not this is an actionable signal.
Here’s the WSJ:
That is just shy of the record $381.4 billion in margin debt set in July 2007.
In March, the level of margin debt stood 28% higher than one year earlier, a time frame that saw the Standard & Poor’s 500-stock index rise 11.4%.
The fear is that as more investors rely on money borrowed against stocks, any significant fall in stock prices will be magnified if investors are forced to sell securities to raise cash and meet margin requirements.
And then let’s briefly mention the extremes in market internals – a whopping 89% of the S&P 500 sits above its 200-day moving average. Again, let’s just be aware of this, we don’t have to debate it as a timing mechanism:
What I want to get across is that risk appetites are almost on full-blast. I don’t believe the margin debt we’re seeing is taking place at the retail level as during past manias. I think that’s hedge fund activity – a plus-15% S&P in the first five months of the year is mighty hard to catch up to and you know they’re killing themselves trying. Margin debt can certainly exacerbate a run of the mill sell-off, but the good news is that hedge funds typically unwind it quickly when they need to.
So the point is, don’t expect a gradual, gentle pullback if and when the Fed starts dropping hints about tapering off QE. I’d be expecting something much more sharp, short and violent. If you understand where it’s coming from, you’ll be steeled against it.
Be careful out there.