Investors, so accustomed to buying any tiny market selloff, have run out of ready capital.
A constraint? Not at all. One can borrow and buy stocks on margin.
It’s a feature of late-stage bull markets, as we described in yesterday’s Grey Swan Live! : Anatomy of A Stock Market Bubble.
While margin requirements are tighter now than they were a hundred years ago in the roaring ‘20s (when a trader could leverage 2X their capital) today’s margin levels are approaching the peak of the dotcom era:
Only during the dotcom peak have traders been more leveraged in the last 30 years. (Source: Cypress Capital)
Leverage is a two-way street. Investors get a tailwind on the way up. But small drops become a considerable problem – leading to “margin calls” when an investor is forced to settle the debt for a loss.
Forced sales are a downside feature of stock market bubbles. The forced sale of stocks and hard assets like gold push prices lower even if the participants don’t want to sell.
Even the market’s post-Liberation Day selloff – which briefly took markets to bear market territory – wasn’t as leveraged as stocks are now, a mere six months later.
For now, the trend is up. But beware, markets don’t move in a straight line in any direction.
~ Addison
P.S. If you missed part one of our Anatomy of a Stock Market Bubble Grey Swan Live!, the replay will be up on site later this morning. We reviewed several charts and indicators, including this one on margin debt.
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