Currently it appears like buyers can’t miss. The S&P retains setting new highs whereas volatility has been comparatively low.
However one thing nonetheless doesn’t really feel proper. So I believed I’d check out what’s truly occurring below the floor.
And one chart specifically caught my eye as a result of it tells me that this rally is operating on borrowed confidence.
As you may see, U.S. margin debt simply climbed to a brand new all-time excessive.
What does it imply for you and your portfolio?
When individuals borrow extra to purchase shares, it often means they’re feeling assured. Typically that confidence is justified. Different occasions, it’s a warning signal.
On this case, it is likely to be each.
Borrowed Cash Is Powering the Market
Again in July, I instructed my Excessive Fortunes readers that: “We’re in a low-volatility, grind-higher section led by retail momentum.”
That hasn’t modified.
On the floor at present, every thing seems okay. Shares maintain climbing and company earnings appear stable.
In different phrases, the trail of least resistance proper now could be to take a “maintain regular” strategy.
However beneath the floor, rising margin debt is like including accelerant to a hearth.
When buyers purchase on margin, they’re amplifying their exposures. Which means wins will be greater, however so can losses.
In a quiet, regular rally that’s high-quality. However the second volatility ticks up or market sentiment sours, that leverage turns into an issue quick. If we get hit with shock inflation numbers, or if tariff rhetoric flares up once more, or if the Fed turns extra cautious, all that leverage might make a small pullback really feel quite a bit greater.
In different phrases, margin debt gained’t begin the fireplace. However it’s going to make it worse when it occurs.
So what do you have to be careful for?
If margin charges start to rise (that means lenders see extra danger) or if there’s an uptick in pressured sell-outs (margin calls), that’s the second the “grind” may shift into one thing quite a bit much less pleasant.
And if the market’s upside turns into concentrated in fewer names whereas margin debt climbs, that’s one other pink flag.
Right here’s My Take
I’m not sounding an alarm bell simply but. This chart is a warning signal, not a pink gentle.
In actual fact, I consider this rally can proceed, and it’s seemingly that we’re nonetheless in that “grind larger” zone.
However this chart tells us that our margin of security has thinned. The upside stays, however getting caught when the tide turns is much extra harmful than it was just a few months in the past.
It’s not a cause to desert the market, however somewhat a reminder that the subsequent leg of upside would require stronger fundamentals and broader participation…
Not simply leverage and momentum.
Regards,
Ian King
Chief Strategist, Banyan Hill Publishing
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