It doesn’t take a rocket scientist to discover that the financial markets are currently packed, with the S&P 500 SPX,
ended Thursday at the fourth all-time high in the young year, up 72% from the March 2020 low. According to Bank of America, the last 12 weeks has been the largest inflow to stocks ever.
Here’s another sign. Margin debt tracked by member firms of the Financial Industry Regulatory Authority has risen over the past two months. “We don’t know how much total leverage there is in the stock market, but margin lending sets the trends, and we had another WTF moment,” said Wolf Richter, author of the Wolf Street blog.
“This spike in margin debt in recent months is another sign that the markets have gone crazy, and everyone is chasing anything, no matter what it is, be it a penny stock with a similar name to something. [Tesla Chief Executive] Elon Musk mentioned in a tweet whether it is Tesla’s TSLA,
stock itself, or any of the EV [electric-vehicle] manufacturers or presumed EV makers who may never mass produce EVs, or even an older automaker now touting its EV investments, or whatever it is, bitcoin BTCUSD included,
– which exploded higher, before dropping 28% in two weeks. “
As the chart shows, spikes in margin debt often precede large stock market debt.
The good news – for those who have invested in the market – is that leverage in the stock market is an accelerator. “If stocks are already rising and investors are confident, they are borrowing money to buy more shares, and can borrow more against their shares because their value has gone up. And this extra borrowed money then chases stocks and creates more buying pressure, and prices continue to rise, ”writes Richter.
And the inevitable bad news: “Stock market leverage is an accelerator on its way down, when stock prices are already falling and brokers are issuing margin calls to their clients who then have to sell stock to stay compliant, which is an attack of forced sales As a result, many debt investors sell before margin calls to avoid being forced to sell at the worst possible time. ”
The buzz
Intel INTC,
was down 4% in premarket trading, up 6% on Thursday when it posted stronger than expected results about 10 minutes before the close of trading. New Chief Executive Pat Gelsinger suggested that most of the production will remain in-house, rather than relying on outside foundry services. The chip maker said it released the report earlier after discovering a hack of the presentation of the results.
IBM’s IBM,
Shares were down 7% after the tech giant reported declining sales for the 30th time in 34 quarters.
Alphabet’s GOOG,
Google threatened to shut down its search service in Australia over a bill that forced it and the social media platform Facebook FB,
to pay publishers.
Prospective officials from the Biden administration have put expectations under control of the COVID-19 pandemic with Jeff Zients, the head of the effort, saying, “What we inherit is so much worse than we could have imagined. introduce.” The White House said President Joe Biden will sign executive orders to expand federal nutrition programs and clarify that workers can receive unemployment benefits while refusing to work in unsafe conditions.
The country furthest in its vaccination efforts, Israel, is still struggling to get coronavirus cases under control. European airlines, including Ryanair Holdings RYAAY,
fell, after British Prime Minister Boris Johnson and Home Secretary Priti Patel did not repeat earlier assurances that the UK will return to normal by April, with speculation that the country will start paying people with the virus to stay at home.
The economic calendar features existing home sales and flash reads from purchasing manager indexes. Those PMIs showed that the situation in the eurozone and the UK deteriorated in January.
The market
US Equity Futures ES00,
NQ00,
pointed to a sharply lower start, with the futures on the Dow Jones Industrial Average YM00,
lose more than 200 points. Crude Oil Futures CL.1,
and gold GC00,
also declined, while the return on the 10-year Treasury TMUBMUSD10Y,
was 1.09%.
The graph
A general rule of thumb is that volatility VIX,
is increased when the shares fall, and it falls when the shares rise. That is clearly not the case now. Hedge fund giant Man Group’s investment institute says there are notable exceptions to the rule. “When volatile sectors dominate the index, we see more cases of simultaneous stock market gains and volatility, particularly during the tech bubble of the late 1990s. Indeed, we are seeing a similar makeup to the S&P 500 these days, ”they said.
The tweet
Listen to this “Hamilton” -like song about Janet Yellen, nominated for Secretary of the Treasury. The full lyrics are here.
Random reads
Comedian Dave Chappelle contracted the coronavirus days after he was seen with talk show host Joe Rogan, singer Grimes and Musk, who had previously had the virus.
Speaking of Musk, the latest SpaceX launch is scheduled for 9:24 am East, weather permitting.
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