Technically Speaking: Margin Debt Confirms Market Exuberance
The comments below are an edited and abridged synopsis of an article by Lance Roberts
Roberts has previously discussed the rising level of bullishness in the market, pointing to indicators like extreme investor positioning, put/call ratios, etc. However, the current surge in margin debt also confirms market exuberance.
The 35% decline in March was only a correction and not a bear market; there is a significant difference between the two. Corrections generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs. Bear markets tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.
Up for discussion: Everything is at an all-time high; the issue of margin debt; event risk; margin debt confirms the exuberance; the market is overbought; it’s all coincident; excuses won’t work; and (it’s) a lot like sex.
While Roberts remains long-biased in his equity portfolios, he has begun to reduce some big winners (take profits) and added to more defensive-oriented positions. While he wants to participate in the market’s current upside, he will give up some gains to protect against the eventual reversion.
In the short term, holding higher cash levels will provide some drag between a portfolio and the major market index. However, when the first cold snap washes across the markets, preparation should protect against the bite.
Roberts remains bullish on the markets currently as momentum is still in play. However, he is taking some precautionary actions.