Margin: How Stock Market Investors Are “Reaching for the Stars”
“This is the highest ratio in the 20-year history of the data.”
by Bob Stokes
Updated: November 17, 2020
One of the historic ways that stock market investors exhibit conviction about the direction of prices is to use leverage or participate in the market with borrowed money. Yet another way of putting it is to "trade on margin."
Going all the way back to 1929, that was the downfall of many who viewed the market as a quick way to get rich.
Here's an Oct. 29, 1929 Boston Daily Globe headline:
Margin Account Dumping Brings Stock Crash...
Yet, you can find examples in more recent history too.
Here's a chart and commentary from our June 2007 Elliott Wave Financial Forecast:
Another area where investors are expressing a wild-eyed optimism rivaling that of 2000 is in their use of leverage. The chart shows that April brought another surge in the use of NYSE margin (shown as a percentage of market capitalization). A similar push accompanied the S&P 500's big top in 2000. The six-month rate of change at the bottom of the chart depicts a rare 4% surge in the use of margin.
As you probably know, the stock market hit a top four months later.
This brings us to what's going on in the latter weeks of 2020. The November Elliott Wave Financial Forecast shows a chart titled "Reaching for the Stars with Borrowed Money" and says:
In recent weeks, some investors have upped the ante by jumping in further with borrowed money. On October 14, the Rydex Total leveraged Bull/Bear Ratio hit 36, which means Rydex mutual fund investors had 36 times as much money invested in leveraged bullish funds vs. leveraged bearish funds. This is the highest ratio in the 20-year history of the data...
The extreme use of margin does not mean the market will top this week or next. Yet, history shows that it does serve as a reliable signal for what may be ahead.
It's best to also look at the stock market's Elliott wave pattern, which can provide an investor with a more precise assessment of a market turn juncture.
Learn what you need to know about what appears to be a momentous juncture in the stock market's price pattern by following the link below.
Get Ahead of the Next Big Shift in the Stock Market
The latest round of volatility may be just the beginning.
You are strongly encouraged to learn about the historical message of the Dow Industrials' Elliott wave pattern.
It all boils down to one thing: portfolio protection!
There are specific steps -- which the recently published November Elliott Wave Financial Forecast calls "the best stance" -- that some investors may choose to take.
Learn about this "best stance" now (found in the Bond Section of the November Elliott Wave Financial Forecast) -- while there's still time.
Follow the link below to get started pronto.
Commodity prices have taken a tumble during the past several days. A financial website says the decline is due to the "China crackdown" and "rising dollar." Yet, Elliott wave analysis foretold of the price drop when commodities were still rallying. Take a look at this chart.
See the Trader’s Classroom forecast and Elliott wave pattern that anticipated a rally which saw US Steel nearly double in price.
Ever heard of the acronym FOBI? It was coined here at Elliott Wave International and stands for the "fear of being in." Yes, just the opposite of the better-known acronym FOMO (fear of missing out). Here's an explanation.