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Friday, January 22, 2021

Nothing can go wrong, or can it? 1/22/21

To listen to the market pundits nothing can go wrong this year.  I am not sure I have ever seen such a unanimous consensus.  Retail investors are loading up as fast as they can.  SPX is almost 20% above where it was in Jan. 2020.  Margin debt is up an astounding 38% from Jan. 2020.  It is not a good thing when margin debt climbs faster than the market itself.  Bullish sentiment is setting new records.  Penny stocks are flying up.  The virus is expected to go away and we will return to business as usual.  This is what major bull market tops look like.  The story has to be great to justify the valuations.  I just can't buy into that rosy scenario.

We all saw what the margin debt unwind did to the markets last spring.  With the margin debt 38% higher an unwind could be even worse.  There is significant downside risk.  The trouble with margin debt risk is there is no way to know when that risk will become a reality.  I think the risk will become reality if the rosy scenario the Wall Street folks have laid out does not play out.  The market is wildly overvalued to go along with the margin debt.  I think the key thing to watch is the moratorium on evictions.  Currently there is a lot of rent and mortgage debt not being paid, but nobody can do anything about it.  You might recall how the foreclosure mess in 2008 crushed stocks.  I am worried we are going to see a similar problem once the moratorium is lifted.  The market is currently bullish until proven otherwise.  However, this is not a time to become complacent.  Be vigilant in case the world is not all roses.

May God bless you all with peace, good health, and happiness.


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