Margin debt and the NYSE

Some times in history, investors feel so confident about the future of stocks, they actually use up all their available cash and then borrow money to invest in the stock market. Now is one of those times!!!

The chart below was created by Doug Short, see his outstanding work here.

Positive net worth takes place when.....Investors have little money borrowed and plenty of cash in their brokerage accounts. (2003 & 2009)

Negative net worth takes place when....Investors have large amounts of money borrowed (on margin) and little cash in there brokerage accounts. (2000, 2007, 2011 & now)

The above chart reflects that only one other time in history has negative net worth been this low, which was the tech bubble back in 2000. The prior two times that negative net worth were this low was 2007 (50% S&P 500 decline) and 2011 (17% S&P 500 decline).
...

Click to expand...

IT’S a ho-hum economy, at best. Four years after the end of the Great Recession, gross domestic product appears to be growing at a lackluster pace, labor productivity is lagging and, despite a slight improvement last month, the unemployment rate is still a painfully high 7.5 percent.

Yet in the financial markets, it’s a much happier world. An epic rally in stocks has been roaring ahead, with the Dow Jones industrial average on Friday briefly surpassing 15,000 for the first time.

Thanks to the intervention of the Federal Reserve, the bond market remains improbably strong, too. The benchmark 10-year Treasury rate fell as low as 1.612 percent last week, driving prices, which move in the opposite direction, to stratospheric levels. That helped Apple sell $17 billion of bonds at yields once reserved for the sovereign debt of only the safest governments.

In short, it’s been a giddy time to be an investor. But while the financial markets are soaring, the real economy appears to be mired in an endless slog. That discrepancy raises a troubling question: How long can financial portfolios continue to swell if wages, employment and corporate revenue remain constrained?
...

Click to expand...

After watching the effects of the mediocre payrolls number yesterday (Friday) which culminated in a push over 1600 in the S&P 500 and a print in the Dow over 15,000, I thought it might be useful to note a few things about this most recent example of a hysteria.

I am on record here as stating that the entire stock market rally is nothing but a Federal Reserve induced bubble brought about by artificially low interest rates starving investors for yield elsewhere. The Fed, along with the Bank of Japan and the ECB I might add, are determined to corral investors and herd them, unthinking like cattle, into equities; the goal being to create an atmosphere of general euphoria towards the economy boosting consumer confidence in the hopes of inducing them to take on more debt and spend.
...
In the middle of that month, we recorded what is the first of THREE DOWNSIDE REVERSAL PATTERNS. I have those noted in the ellipses. Do you see what I am seeing here? Note from that point forward, the upward momentum in this market continues to decline even as it has gone on to make one new high after another. This has occurred even though we have recorded an additional TWO more downside reversal patterns.

Just this past week on Wednesday, the market experienced a very strong reversal pattern on extremely high volume that was totally contradicted, yet again, in the next two days' worth of trading. Of course, the Friday rally blew right through the top of the reversal pattern. Yet, momentum did not register a new high for the move.

What I am describing here are classic textbook cases of negative divergence. These are all warning signals that the uptrend is losing momentum but so far it has not mattered one bit. When you have the equivalent of $160 billion of funny money being conjured into existence each and every month by the Fed and the BOJ, downside reversal patterns, normally one of the most reliable technical signals that exist, are invalidated time after time due to the "BUY the DIP" mentality that has been created in the herd compliments of the various Central Banks.
...
... I keep coming back to the same point - who in their right mind would be chasing stocks higher and higher given the deteriorating internals of this market?

I am not sure how history is going to record this period but I suspect, after the bubble finally pops, (and who can say how high this thing will go before it does), commentators and pundits will all point to the warnings that were repeatedly ignored and will provide copious illustrations of quotations from various players of this day explaining to those of our time why stocks were a great buy, all the way up until the final moment that the bubble burst wide open.

CAVEAT EMPTOR!

Click to expand...

Aubuy said:

At first this chart was persuasive, but I looked at it again and I'm not so sure. The drop shown in earnings is less than 1% which is a very small amount versus the scale of increased stock prices. 1% isn't much against the demand for yield being created by this artificially low (financial repression) interest rate world. It's the Japanese bond interest rate spike, and eventually ours (watch the 10 year over the next few weeks) that is going to make things really interesting.

Click to expand...

benjamen said:

However, just like in the metals market, the stock market is pricing in the expected inflationary effects of the federal reserve's actions. The hot money is flowing out of paper metal and into paper stocks.

$.02

Click to expand...