Bulletin
Investor Alert

New York Markets Open in:

Need to Know Archives | Email alerts

Jan. 22, 2021, 3:14 p.m. EST

Here’s another sign that markets have gone nuts and everyone is chasing everything

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    S&P 500 Index (SPX)
  • X
    Tesla Inc. (TSLA)
  • X
    Bitcoin USD (BTCUSD)

or Cancel Already have a watchlist? Log In

By Steve Goldstein

It doesn’t take a rocket scientist to discern that financial markets are full of juice at the moment, with the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.34% ending Thursday at its fourth record high of the young year and up 72% from the lows of March 2020. The last 12 weeks have seen the largest inflows to stocks ever, according to Bank of America.

Here’s another sign. Margin debt tracked by member firms of the Financial Industry Regulatory Authority has spiked over the last two months. “We don’t know how much total stock market leverage there is, but margin loans indicate the trends, and we had another WTF moment,” says Wolf Richter, author of the Wolf Street blog .

“This spike in margin debt over the past few months is another sign that markets have gone nuts, and everyone is chasing everything, regardless of what it is, whether it’s a penny stock with a similar name to something [Tesla Chief Executive] Elon Musk mentioned in a tweet, or whether it’s Tesla’s /zigman2/quotes/203558040/composite TSLA -4.86% stock itself, or any of the EV [electric-vehicle] makers or presumed EV makers that might never mass-produce EVs, or even a legacy auto maker that is now touting its EV investments, or whatever it is, including bitcoin /zigman2/quotes/31322028/realtime BTCUSD -1.49% — which exploded higher, before plunging 28% in two weeks.”

As the chart shows, spikes in margin debt often precede major stock-market busts.

The good news — for those invested in the market — is that stock market leverage is an accelerator. “When stocks already rise, and investors feel confident, they borrow money to buy more stocks, and they can borrow more against their stocks because their value has risen. And this additional borrowed money is then chasing after stocks and thereby creating more buying pressure, and prices surge further,” Richter writes.

And the inevitable bad news: “Stock market leverage is an accelerator on the way down, when stock prices are already falling and brokers issue margin calls to their clients that then have to sell stocks to remain compliant, triggering a bout of forced selling, and many leveraged investors sell ahead of margin calls in order to avoid being forced into selling at the worst possible moment.”

The chart

A general rule-of-thumb is that volatility /zigman2/quotes/210598281/delayed VIX -1.30% is elevated when stocks fall, and that it falls when stocks rise. That is clearly not the case now, however. A report from the hedge-fund giant Man Group says there are notable exceptions to the rule. “When volatile sectors dominate the index, we get more instances of simultaneous increases in equity markets and volatility, notably during the tech bubble of the late 1990s. Indeed, we see a similar makeup of the S&P 500 today,” they said.

The tweet

Check out this “Hamilton”-esque song about Treasury secretary nominee Janet Yellen. Full lyrics are here .

Random reads

Comedian Dave Chappelle contracted coronavirus , days after being seen with talk-show host Joe Rogan, the singer Grimes, and Musk, who previously has had the virus.

Speaking of Musk, the latest SpaceX launch is scheduled for 9:24 a.m. Eastern, weather permitting.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch

/zigman2/quotes/210599714/realtime
US : S&P US
3,768.47
-51.25 -1.34%
Volume: 3.44B
March 4, 2021 5:08p
loading...
/zigman2/quotes/203558040/composite
US : U.S.: Nasdaq
$ 621.44
-31.76 -4.86%
Volume: 65.92M
March 4, 2021 4:00p
P/E Ratio
988.61
Dividend Yield
N/A
Market Cap
$626.98 billion
Rev. per Employee
$445,694
loading...
/zigman2/quotes/31322028/realtime
US : CoinDesk
47,212.51
-711.78 -1.49%
Volume: 0.00
March 5, 2021 6:03a
loading...
/zigman2/quotes/210598281/delayed
US : Cboe Indices
28.20
-0.37 -1.30%
Volume: 0.00
March 5, 2021 4:49a
loading...

This Story has 0 Comments
Be the first to comment
More News In
Markets

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.