Need to Know: Here’s another sign that markets have gone nuts and everyone is chasing everything

It doesn’t take a rocket scientist to discern that financial markets are full of juice at the moment, with the S&P 500
SPX,
+0.03%

ending Thursday at its fourth record high of the young year and up 72% from the lows of March 2020. The last 12 weeks have seen the largest inflows to stocks ever, according to Bank of America.

Here’s another sign. Margin debt tracked by member firms of the Financial Industry Regulatory Authority have spiked over the last two months. “We don’t know how much total stock market leverage there is, but margin loans indicate the trends, and we had another WTF moment,” says Wolf Richter, author of the Wolf Street blog.

“This spike in margin debt over the past few months is another sign that markets have gone nuts, and everyone is chasing everything, regardless of what it is, whether it’s a penny stock with a similar name to something [Tesla Chief Executive] Elon Musk mentioned in a tweet, or whether it’s Tesla’s
TSLA,
-0.64%

stock itself, or any of the EV [electric-vehicle] makers or presumed EV makers that might never mass-produce EVs, or even a legacy auto maker that is now touting its EV investments, or whatever it is, including bitcoin
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+1.30%

— which exploded higher, before plunging 28% in two weeks.”

As the chart shows, spikes in margin debt often precede major stock-market busts.

The good news — for those invested in the market — is that stock market leverage is an accelerator. “When stocks already rise, and investors feel confident, they borrow money to buy more stocks, and they can borrow more against their stocks because their value has risen. And this additional borrowed money is then chasing after stocks and thereby creating more buying pressure, and prices surge further,” Richter writes.

And the inevitable bad news: “Stock market leverage is an accelerator on the way down, when stock prices are already falling and brokers issue margin calls to their clients that then have to sell stocks to remain compliant, triggering a bout of forced selling, and many leveraged investors sell ahead of margin calls in order to avoid being forced into selling at the worst possible moment.”

The buzz

Intel
INTC,
+6.46%

fell 4% in premarket trade, after rallying 6% on Thursday when it released stronger-than-forecast results about 10 minutes before the close of trade. Incoming Chief Executive Pat Gelsinger suggested most of its manufacturing will remain internal, rather than relying on external foundry services. The chip maker said it released the report early after discovering a hack of its results presentation.

IBM’s
IBM,
+1.21%

shares declined 7%, after the technology services giant reported declining revenue for the 30th time in 34 quarters.

Alphabet’s
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+0.23%

Google threatened to shut its search service in Australia over a proposed law forcing it and social media platform Facebook
FB,
+2.02%

to pay publishers.

Incoming Biden administration officials have been playing down expectations on getting the COVID-19 pandemic under control with Jeff Zients, the head of the effort, saying, “what we’re inheriting is so much worse than we could have imagined.” The White House said President Joe Biden will be signing executive orders extending federal nutrition programs and clarifying that workers can collect unemployment benefits while refusing to work in unsafe conditions.

The country furthest along in its vaccination efforts, Israel, is still struggling to get the coronavirus cases under control. European-listed airlines including Ryanair Holdings
RYAAY,
-2.04%

fell, after U.K. Prime Minister Boris Johnson and Home Secretary Priti Patel didn’t repeat previous assurances that the U.K. will be getting back to normal by April, with speculation the country will start paying people with the virus to stay home.

The economics calendar features existing home sales and the flash readings of purchasing managers indexes. Those PMIs showed conditions in the eurozone and the U.K. deteriorating in January.

The market

U.S. stock futures
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-0.68%

NQ00,
-0.55%

were pointing to a sharply lower start, with the futures on the Dow Jones Industrial Average
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-0.79%

losing more than 200 points. Crude-oil futures
CL.1,
-2.32%

and gold
GC00,
-0.93%

also fell, while the yield on the 10-year Treasury
TMUBMUSD10Y,
1.092%

stayed at 1.10%.

The chart

A general rule-of-thumb is that volatility
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+10.98%

is elevated when stocks fall, and that it falls when stocks rise. That is clearly not the case now, however. The investing institute of hedge-fund giant Man Group says there are notable exceptions to the rule. “When volatile sectors dominate the index, we get more instances of simultaneous increases in equity markets and volatility, notably during the tech bubble of the late 1990s. Indeed, we see a similar makeup of the S&P 500 today,” they said.

Check out this “Hamilton”-esque song about Treasury secretary nominee Janet Yellen. Full lyrics are here.

 
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