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Monday, March 18, 2013


I suspect most people have heard the saying that bull markets are born in pessimism and die in euphoria.  What is so interesting that despite so many people knowing this market reality, hardly anybody recognizes either state in real time.  I saw this article the other day and found it interesting.

Sentiment Indicators Hitting Euphoric Levels as Dow Hits All-Time Highs?

This chart is in the article.

The author says this chart shows we do not have euphoria and so the market has more room to go up.  This chart does not cover the major top of 2007.  I wonder what it looked like then.

I believe margin debt is probably the best true measure to determine if there really is any kind of euphoria.  When people really, really feel strongly about the market going up they load up on margin.  The last reading we got for margin debt was for Jan. and it was the second highest reading on record.  Surpassed only by the summer of 2007.  It is likely higher by now, and may even eclipse the record set in 2007.  That my friends is euphoria.  Here is the SPX chart from 2007 showing the pullback that occurred from that historic peak in margin debt.

That is SPX going from 1556 to 1370 in five weeks.  So we have the same price in SPX with probably very similar margin debt numbers.  It could easily work out different this time, but is it guaranteed that the outcome is a smaller pullback?  Margin debt changes the risk profile considerably.  An unwind is hard to see before it happens.  It just starts and snowballs.  To my knowledge there has never been a gentle margin debt unwind.  People do not seem to sell and take off the debt while the market is rising.  They always wait until they have to.  Euphoria can turn into panic amazingly fast sometimes.


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