RISING MARGIN DEBT AT A TIME OF RISING INTEREST RATES CAN MAKE STOCK MARKET VULNERABLE

To gain an edge, this is what you need to know today.

Rising Margin Debt

Please click here for a chart showing the progression of margin debt.

Note the following:

  • The table shows that margin debt has been rising.
  • Anecdotal evidence is that there is a significant increase in margin debt in momo stocks.  As momo stocks have gone up, the momo crowd has had more margin available to them.  Momo has increased its bets using the higher available margin.
  • Margin is a two-edged sword.  It works great as long as momo stocks keep going higher. However, if momo stocks start dipping, many among the momo crowd will get margin calls.  Anecdotal evidence is that many among the momo crowd are fully invested and the only way for them to meet margin calls is to sell stocks.
  • The foregoing scenario is important for prudent investors to consider especially at a time when interest rates are rising and sentiment is very positive.
  • To illustrate the situation, we have been using the analogy of a boat where everybody is on one side.  Nothing bad happens as long as the waters are calm.  However, the boat can tip over if a wave comes from the wrong direction.  Increased margin debt is like adding more weight to the side of the boat where everybody is gathered.

Bitcoin

After hitting $57,000 over the weekend, bitcoin is pulling back to the $52,000 range.  There is a tug-of-war.  Bulls believe it is going to $100,000 due to excessive money printing and borrowing.  Bears believe that the speculation is way overdone.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 oil in the early trade. Smart money is 🔒.

For longer-term, please see oil ratings.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking up and bonds are ticking down.

The dollar is weaker.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1798, silver futures are at $27.51, and oil futures are $60.13.

S&P 500 futures resistance levels are 3920, 4000 and 4200: support levels are 3860, 3800 and 3630.

DJIA futures are down 166 points.

Protection Bands and What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold existing positions. Based on individual risk preference, on dips, consider holding 🔒 in cash or treasury bills or short-term bond funds or allocated to short-term tactical trades and short to medium-term hedges of 🔒 and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

To take a free 30-day trial to paid services to gain access to more opportunities, please click here.

This post was just published on ZYX Buy Change Alert.

 

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