This page has been archived and commenting is disabled.
Bull Market Most Overbought/Leveraged In History
Submitted by Lance Roberts via STA Wealth Management,
Last week, I stated the market was approaching a fairly important decision point. To wit:
"As shown in the chart below, the market has been remained trapped in a tightening pattern of higher lows and lower highers. This type of action is like the compression of spring. In the next few days, the markets will make an important decision. A breakout to the upside of this consolidation will confirm the current bullish trend, and portfolio actions should remain allocated and tilted more heavily towards equity related risk. However, a break to the downside will likely suggest a more significant correction in the near term. It is worth noting that this consolidation in the market is happening during a decline of relative strength. This is a warning sign that generally bodes poorly for the bulls."
(Note: The chart has been updated to Friday's close to show the breakout of that consolidation.)
"Since portfolios are currently fully allocated to the market, if the market breaks out to the upside of the current consolidation this will simply confirm that the "bulls" are still currently in charge of the market. No action will be required."
As shown, that breakout did occur this past Friday,which suggests that the bullish trend is still intact and that portfolios should remain currently tilted towards equity exposure.
However, this does NOT mean that all market risk is now resolved, or that investors should return to their complacent slumber.
As discussed in this past weekend's missive the market is currently more overbought now that at any other point in history going back to 1940.
The vertical dashed white lines show that when the extreme overbought condition begins to decline it is coincident with past historical peaks in the market. Furthermore, the long term MACD (moving average convergence divergence) has also turned down which has also historically aligned with more significant market peaks and corrections.
Importantly, this overbought indication is "longer-term" in nature and is slow to move. This means that in the short-term, stocks can, and most likely will, continue to try and advance further due to underlying price momentum. As I have discussed previously:
"The effect of momentum is arguably one of the most pervasive forces in the financial markets. Throughout history, there are episodes where markets rise, or fall, further and faster than logic would dictate. However, this is the effect of the psychological, or behavioral, forces at work as 'greed' and 'fear' overtake logical analysis.
This is the basic application of Newton's Law Of Inertia, that states 'an object in motion tends to remain in motion unless acted upon by an unbalanced force.' In other words, when markets begin strongly trending in one direction, that direction will continue until an 'unbalanced' force stops it."
Currently, with Central Banks fully engaged in monetary interventions on an unprecedented global scale, there is seemingly nothing that can stop the current advance. Of course, it is that very "thought process" that has been a hallmark of exuberant markets in the past.
Margin Debt Strikes New High
Along with the markets currently being more overbought now than at any other point in history, they are also more leveraged as well.
Late last week the NYSE released its latest margin debt figures for March. Despite a rather sluggish market, investors piled on margin debt pushing levels to all-time highs as shown below.
It is worth noting that when net credit balances have plunged very negative levels it has been coincident with major mean reverting events in the market.
While "this time could certainly be different," the reality is that leverage of this magnitude is "gasoline waiting on a match." When an event eventually occurs, that creates a rush to sell in the markets, the decline in prices will reach a point that triggers an initial round of margin calls. Since margin debt is a function of the value of the underlying "collateral," the forced sale of assets will reduce the value of the collateral further triggering further margin calls. Those margin calls will trigger more selling forcing more margin calls, so forth and so on.
Notice in the chart above that margin debt reductions begins innocently enough before accelerating sharply to the downside.
Tending The Garden
The combined overbought, overleveraged condition of the financial markets is of extreme risk to investors currently. While the bullish trend remains intact currently, it is extremely prudent to perform some risk management in portfolios. As discussed this past weekend:
"...it is worth remembering that portfolios, like a garden, must be carefully tended to otherwise the bounty will be reclaimed by nature itself. If fruits are not harvested (profit taking) they 'rot on the vine.' If weeds are not pulled (sell losers), they will choke out the garden. If the soil is not fertilized (savings), then the garden will fail to produce as successfully as it could.
So, as a reminder, and considering where the markets are currently, here are the rules for managing your garden:
1) HARVEST: Reduce “winners” back to original portfolio weights. This does NOT mean sell the whole position. You pluck the tomatoes off the vine, not yank the whole plant from the ground.
2) WEED: Sell losers and laggards and remove them garden. If you do not sell losers and laggards, they reduce the performance of the portfolio over time by absorbing 'nutrients' that could be used for more productive plants. The first rule of thumb in investing 'sell losers short.'
3) FERTILIZE AND WATER: Add savings on a regular basis. A garden cannot grow if the soil is depleted of nutrients or lost to erosion. Likewise, a portfolio cannot grow if capital is not contributed regularly to replace capital lost due to erosion and loss. If you think you will NEVER LOSE money investing in the markets…then STOP investing immediately.
4) WATCH THE WEATHER: Pay attention to markets. A garden can quickly be destroyed by a winter freeze or a drought. Not paying attention to the major market trends can have devastating effects on your portfolio if you fail to see the turn for the worse. As with a garden, it has never been harmful to put protections in place for expected bad weather that didn’t occur. Likewise, a portfolio protected against 'risk' in the short-term, never harmed investors in the long-term."
With overall market trend still bullish, there is little reason to become overly defensive in the very short-term. However, I have this nagging feeling that the “spring” is now wound so tightly, that when it does break loose, it will likely surprise most everyone.
- 29081 reads
- Printer-friendly version
- Send to friend
- advertisements -



BUY THE TOP!!!
Keep BTFD.........it CANT lose....ITS DIFFERENT THIS TIME..........hehehehehe ....oh and DONT buy gold......
I don't believe this propaganda for a second. The economy is just now lifting off
;-)
Bull "market"......
I didn't really start to watch 'markets' closely until around the time the last peak was already selling off in 2008.
Of course, what followed was all the "whocouldanode?" and "of course it was a bubble - in hindsight" comments and analysis.
This is the first time I will get to witness a true blow-off top and subsequent crash in real-time. It's especially fun to listen to all the sell-siders rationalizing why this isn't a bubble.
When the inevitable crash comes (and likely sooner than most are expecting) it will be extremely fun to hear all the bleating bulls whine.
It really is like witnessing a slow-motion train wreck...
"the market is currently more overbought now that at any other point in history going back to 1940"
the market is currently more manipulated via CB's and Algos now that at any point in history going back to 1940. Fixed it.
MOAR QE!
WORLDWIDE QE!
EVERYTHING ALL THE TIME!
the "market" is no longer an indicator of reality. when the collapse occurs, the "market" will be soaring. if you want your future vested in rainbows and unicorns, go long and see where it takes you!
We have a ways to go
We have a ways to go
Agreed - w/ more charts 'n stuff...but this time is different...it's not a mindset or investors that matter any longer. The digital HFT markets are now so clearly managed that any "market event" would likewise be a managed affair.
http://econimica.blogspot.com/
there is no "an event", there is only the fed
I'm wondering how much of that margin debt they control. As who else would dare to take such risk without Janet's assurances?
If only one could accurately measure the amount of true price discovery in that "market"...
might be a telling graph...
remember gold was following the debt ceiling too... ...go ahead, show me that overlay motherfucker.
LOP,
You seem extra angry today
Not at all, the bailouts are going to be massive this time...
I seem to recall the douchebags in congress legislated it and obola signed off just recently.
If we can just ride out this 20 year accelerating ' hiccup ' we might just come through on the other side all the more prosperous & the wiser.
A. Lunatic
Hah! I laugh at your technicals. Here, have some moar QE and a cookie.
Looking at fundamentals used to matter
looking at macro trends used to matter
looking at charts used to matter
all one needs to do now is look at the fed douchbag calander as to when they will be opening their mouths and hit buy right before, 95% win ratio
What's reality got to do with anything? We have the Fed.
Bull Market Most Overbought/Leveraged In HistoryIs it "no shit Sherlock" day? Why wasn't I told?
The Fed will push it to even more distortion.
those VIX calls are a bahgahn !!
I have a feeling the bailouts will be bigger than ever shortly.
How's my logic:
1. Leverage is a good thing on the way up.
2. This market only goes up.
3. Leverage is Good.
4. Therefore, Hillary 2016
The un-fed will buy up the whole fucking DOW if need be, can't allow any corrections. Must keep the facade in place. I am surprised the dow isn't 20,000 already!
Banksters Inc. are a greedy group of blood sucking bastards. Won't stop until they bleed the whole planet dry, and then they'll start over again!
I have a question... even if you're levered to the nose and companies continue to buy back stock, and the Fed keeps rates at basically 0%, and plunge protection is in place... doesn't there come a time where the disconnect becomes so heavy that the market collapses on itself, like a turkey on hormones that grows so big that it snaps it own legs under the weight? I mean, the push higher has to be supported by investors/Fed/buybacks that come with extreme risk because there is no exit....there is no buyer of last resort. It's up up up or complete and total collapse at some point. Because the higher we go, the more the buyer risks since the underlying fundementals of the market are weakening. More leverage is needed just to stay afloat...more buybacks must be performed to tread water. I mean it's elevator up and market bidless down at this point. But we could see S&P 4000 before the tidal wave of liquity snaps the markets legs....or could happen tomorrow. In the famous words of Joe Schmoe from the Joe Schmoe Show... "What is going on?"
Look & See
http://showrealhist.com