With over half of all the stocks in the Russell 2000 [5] and Nasdaq already in a bear market [6], US equity market indices are becoming increasingly driven by a highly concentrated set of stocks that lack any relationship to macro factors. As BofA shows in the charts below, participation in the record-high exuberance in stocks is waning... and waning fast...
S&P 500 and NYSE Breadth is diverging...
[7]
The Nasdaq's breadth is plunging...
[8]
And the Russell 2000's component participation is a disaster...
[9]
But, the biggest concern, as BofA warns, a new low for net free credit at -$182 billion is a major risk should the market drop..
[10]
Net free credit is free credit balances in cash and margin accounts net of the debit balance in margin accounts. Net free credit dropped to -$182b and moved to a new low below the prior record of -$178b in February. This measure of cash to meet margin calls remains at an extreme low or negative reading below the February 2000 low of $-129b.
The risk is if the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks or get cash from other sources to meet the margin calls.
This would exacerbate an equity market sell-off.
