Print the page
Increase font size

Posted April 07, 2021

Ray Blanco

By Ray Blanco

The One Thing That Could Derail the Bull Market

Is your neighbors brokerage account the next Archegos?

Last week, we talked a bit about the leverage that brought about the explosive unwind of Bill Hwangs Archegos Capital, a $10 billion family office that had made leveraged bets on stocks and sent those same stocks into free fall when Wall Street banks forced a margin call on it.

As I told you at the time, the Archegos blowup was well contained it didnt create a contagion.

But theres a closely related risk thats currently looming.

It may be the only thing that could derail the current bull market

Im talking about the growing leverage were seeing employed by other market participants, including retail investors.

Have a look at the latest data from financial regulator Finra:

Source: Wall Street Journal

Margin debt has surged more than 49% in the last year, the fastest one-year increase since 2007 and overshadowed only by the dot-com bubble in 1999, per the Wall Street Journal. Simply put, investors are borrowing lots of cash to put it in the stock market.

I want to make one thing very clear: Using leverage isnt necessarily a bad thing. There are some strategies where leverage makes a lot of sense and can be used with relatively low risk plain-old vanilla stock speculating isnt one of them.

But thats likely where a lot of that margin debt expansion has come from.

Brokerage firms like Robinhood make investing on margin incredibly easy.

Margin is attractive because you can multiply your potential gains if things work in your favor.

But the trouble happens when a trade moves against you. A firm using 5X leverage loses 100% of their own money if their portfolio loses just 20%. On the way down, brokers anxious about clients not being able to repay margin loans can force liquidation, driving prices down further.

This is why, in bear markets, everything seems to go down at the same time.

To protect investors, the Fed puts limits on how much investors can borrow. Generally, its 2X. In other words, if you have $5,000 in a brokerage account, you can borrow another $5,000 and put it in the market. While thats far less leverage than Wall Street firms like Archegos often achieve by using complex derivatives, the effects are the same regular folks have a lot less to lose.

And thats why a leverage shakeout looks like the one thing that could derail the current bull.

The good news is that there arent any major cracks showing in the foundation yet. The market took the Archegos implosion in stride, which is a good sign. But it was a warning.

Well be watching margin debt closely as market upside continues this year. Borrowing needs to slow rapidly for the current trend to be sustainable.

Sincerely,

Jonas Elmerraji, CMT

BUY ALERT: Why This COVID Vaccine Maker’s Stock Could Soar 50%

BUY ALERT: Why This COVID Vaccine Maker’s Stock Could Soar 50%

Posted July 22, 2021

By Jonathan Rodriguez

Alright, alright! I'm J-Rod and welcome to Stocks that Rock. Each week, I turn up the volume on a breakout stock that will rock your retirement account. Today, I'm going to reveal my...
The Truth Behind Bitcoin’s Bounce Today

The Truth Behind Bitcoin’s Bounce Today

Posted July 21, 2021

By Jonas Elmerraji

For the past few weeks, we’ve been watching the story unfold in the world’s biggest cryptocurrency. And it begs the question: Is it finally curtains for Bitcoin?
Just a Billionaire’s Joyride

Just a Billionaire’s Joyride

Posted July 20, 2021

By Ray Blanco

This morning, Jeff Bezos and his team successfully performed a suborbital flight with Bezos in tow. But was it just a billionaire’s joyride? Or is there something more to it…
The Billionaire Space Race Heats Up

The Billionaire Space Race Heats Up

Posted July 19, 2021

By Ray Blanco

Markets are giving back more and more gains recently as we head further into the summer doldrums. But all the while, we’re seeing some amazing things come out of the tech world… including major advances in many different sectors
The Three Lessons I Learned From My Biggest Loss Ever

The Three Lessons I Learned From My Biggest Loss Ever

Posted July 15, 2021

By Jonathan Rodriguez

J-Rod shares three lessons he learned from the biggest trading loss of his career.
Mining Bitcoin With Equipment From the 1800s!?

Mining Bitcoin With Equipment From the 1800s!?

Posted July 14, 2021

By Ray Blanco

Can you mine Bitcoin with equipment built in the 1800s? It turns out the answer is yes.