Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Technically Speaking: Despite Correction, Investors Are Exuberant

By Lance RobertsStock MarketsApr 06, 2021 05:46AM ET
Technically Speaking: Despite Correction, Investors Are Exuberant
By Lance Roberts   |  Apr 06, 2021 05:46AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

Despite the recent correction in the markets, leading to a hedge fund imploding, investors remain exuberant. The hopes for more stimulus, government spending, and Fed liquidity displace fears of a correction.

Before we get into the technical review of the markets, I thought Jason Zweig summed up the current environment well.

“This isn’t a bull market or a bear market. It’s a know-nothing market. Bragging rights used to go to those investors who worked the hardest at learning the most. Now the glory often goes to those who know the least and don’t even care.

"‘I don’t know what the f— I’m doing,’ a young man said in a TikTok video in January. 'I just know I’m making money.’ He added that he’d been trading stocks for only three days, but ‘just like that, made $300 for the day.’ In the next few weeks that young man, Danny Tran, racked up roughly 500,000 followers on TikTok.”

That is the new investing world we live in. A world where individuals are getting investing “expertise” from young individuals on social media with huge followings. It is effectively the “blind leading the blind.”

Is there a risk to investing? Absolutely.

But investors have been trained by the Federal Reserve to “buy the dips.” Importantly, even as valuations stretch suggesting lower future returns, investors continue to expect above-average results. Such was the result of a recent Investopedia investor poll with readings expecting 5% or more and stocks and ETF’s over other asset classes.

Investopedia Poll
Investopedia Poll

In other words, it’s a “risk-on” market, baby!

Bull Markets Forgive Bad Mistakes

As Howard Marks noted in a recent Barron's interview:

“Fear of missing out has taken over from the fear of losing money. If people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s where we are now. That’s what the Fed engineered by putting rates at zero.”

As is often the case, investors tend to pile into markets when the risk versus reward is out of their favor. However, during a raging bull market, investors are forgiven for buying fundamentally unsound companies. Currently, the number of “unprofitable” companies is at the highest level since the era.

For now, that hasn’t mattered as the number of companies trading above their 200-dma is at some of the highest levels on record as well. When virtually every stock in an index is in a bullish trend, it is usually a warning sign.

S&P 500 Stocks Above 200 DMA
S&P 500 Stocks Above 200 DMA

The Issue Of Margin Debt

This exuberance requires “fuel,” which brings us to margin debt. As I explained previously:

“Margin debt is not a technical indicator for trading markets. What margin debt represents is the amount of speculation occurring in the market. In other words, margin debt is the ‘gasoline,’ which drives markets higher as the leverage provides for the additional purchasing power of assets. However, ‘leverage’ also works in reverse as it supplies the accelerant for more significant declines as lenders ‘force’ the sale of assets to cover credit lines without regard to the borrower’s position.”

The last sentence is the most important. The issue with margin debt, in particular, is that the unwinding of leverage is NOT at the investor’s discretion. It is at the discretion of the broker-dealers that extended that leverage in the first place. (In other words, if you don’t sell to cover, the broker-dealer will do it for you.)

When lenders fear they may not recoup their credit-lines, they force the borrower to either put in more cash or sell assets to cover the debt. The problem is that “margin calls” generally happen all at once, as falling asset prices impact all lenders simultaneously.

Leverage Extremes

Such is what we saw happen with Credit Suisse (SIX:CSGN) and Nomura Securities recently. As concerns over forced liquidations of a major hedge fund grew, positions were being liquidated “en masse” to try and stem the potential losses. The bloodletting, when this occurs, is always faster and deeper than most imagine.

Currently, the exuberance of investors is on full display. With a fresh round of “stimmy” checks reloading bank accounts, margin debt as a percentage of real disposable incomes has shot to record highs. (You may want to pay attention to previous peaks.)

Margin Debt As Percent Of Real DPI S&P 500
Margin Debt As Percent Of Real DPI S&P 500

If we apply a “stochastic indicator” to margin debt, such also confirms we are at extremes normally associated with lower future return rates. While such is not an immediate issue, which investors dismiss as “wrong this time,” it does suggest increased risk over the next few months.

Margin Debt - Stochastic Oscillator - S&P 500
Margin Debt - Stochastic Oscillator - S&P 500

Such is always the case with “margin debt.” It is NEVER an issue—until it is.

Margin Debt Confirms The Exuberance

As noted, when markets are rising and investors are taking on additional leverage to increase buying power, margin debt supports the advance. However, the magnitude of the recent surge in margin debt also confirms the current levels of investor exuberance.

The chart below shows the rate of change from the lowest point of margin-debt over the last year. Increases in margin debt are primarily not an issue. It is when there are exceedingly sharp increases in debt that generally signal trouble for markets ahead.

Margin Debt ROC From 12 Month Low
Margin Debt ROC From 12 Month Low

That surge in margin debt is not the “cause,” but rather the reflection of the “bullish market mania” which has engulfed investors currently. We can see that exuberance in BofA’s indicator.

Bull-Bear Indicator History
Bull-Bear Indicator History

Such is also reflected in the extreme price deviations from the S&P 500’s two-year (24-month) moving average.

Deviation Above/Below Long Term Mean
Deviation Above/Below Long Term Mean

As noted in “Zen & The Art Of Risk Management” the highest correlation between stock prices and future returns comes from valuations.

“Short-term price changes of stocks are based solely on liquidity, or the balance of buyers and sellers. Over longer periods, price changes become more dependent on valuations and less on supply and demand. The following scatter plots compare CAPE valuations to subsequent 10-year and 3-month returns to highlight this fact.”

“Stocks are extremely expensive. Regardless of whether you agree with our earnings model or not, drawdown risk is higher today than at almost any other time. The Goldman Sachs table below uses multiple valuation metrics and comes to the same conclusion.”

Valuation Metrics
Valuation Metrics

This Time Is Different

As noted by Jason Zweig, this has indeed been a “stock ‘gamblers’ market.”

“You could have made good money even with bad stock picks. It was like being invited to bet on black, without limits, at a roulette wheel on which 37 of the 38 pockets were black.

Why waste time and energy educating yourself while sheer ignorance pays off so easily?”

Yes! This time is indeed different. But, so was every previous overly exuberant bull market in history. As Sentiment Trader summed up the last time we wrote on this topic, such is usually not the case.

Whenever some of this data fails to lead to the expected outcome for a few weeks or more, we hear the usual chorus of opinions about why it doesn’t work anymore. This has been consistent for 20 years, like…

  • Decimalization will destroy all breadth figures (2000)
  • The terror attacks will permanently alter investors’ time preferences (2001)
  • The pricking of the internet bubble will forever change option skews (2002)
  • Easy money will render sentiment indicators useless (2007)
  • The financial crisis means relying on any historical precedents are invalid (2008)
  • The Fed’s interventions mean any indicators are no longer useful (2010 – present)

All of these sound good, and for a time it seemed like they were accurate. Then markets would revert and the arguments would get swept into the dustbins of history.”

While this time is certainly different due to unprecedented interventions, we suspect the outcome will eventually be the same.

Increasing Portfolio Exposure

Here is where I throw you a curveball.

While I just laid out all of the longer-term risks, we just increased exposure to portfolios for the end of the seasonally strong period.

Such is the point that many miss about our analysis. While we are most definitely “bearish” in our views (both technical and fundamental) longer-term, we also understand over the next few days or weeks it is “sentiment” that carries the market.

As such, we increased exposure in some of our beaten-up growth stocks, while continuing to barbell those positions with the “reflation/recovery” momentum trade. Our job as portfolio managers is to make sure we are creating returns for our clients, with a strict set of “risk controls” in place to protect capital.

At the moment, it certainly feels as if the market is unstoppable. Such is usually the case in “heat of the mania.” As Warren Buffett once quipped:

“The market is a lot like sex, it feels best at the end.”

We remain “bullish” on the markets currently as momentum is still in play. However, it is likely that by mid-summer we will see a decent correction as the “peak” in the economic and earnings data becomes visible.

Such is why I agree with Jason’s conclusion:

Where ignorance is bliss, ‘tis folly to be wise,” wrote the British poet Thomas Gray. One of these days, perhaps sooner rather than later, stocks will stop going up and the importance of understanding what you own will reassert itself. For the time being, though, investors who used to think of themselves as wise may continue to look foolish.”

Technically Speaking: Despite Correction, Investors Are Exuberant

Related Articles

Technically Speaking: Despite Correction, Investors Are Exuberant

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Hichem Trabelsi
Hichem Apr 06, 2021 12:04PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thanks for the excellent article.. Too many "hidden" entities and actors playing with the market and manipulating it.. i don't have a very good feeling about this.. not sure where this will end up ? ..
George Pichurov
George Pichurov Apr 06, 2021 8:53AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
correction? What correction? Its seven days up.
Andrew Bevan
Andrew Bevan Apr 06, 2021 8:47AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I thoroughly enjoyed this article, thanks, and as I commented in another thread it as if the story of Icarus left us no wiser.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email