Fuel for the Next Bear Market
In 2013, the S&P 500 surpassed its October 2007 all-time high.
I watched as CNBC news anchors sat stunned at the fact that busses of local newscasters weren’t pulling up to document the historic moment.
And it was indeed an historic moment.
The stock market had never been at a higher point, and yet the excitement that joined the 2007 high was absent. Of course, the 2000 market crash that took roughly two years to put in a bottom had left many traders wary of any attempts by the market to reach new highs.
The lack of this mainstream enthusiasm helped our current bull market earn the moniker “the most hated bull market ever.”
But one chart tells us this is far from the truth. In fact, it is one of the longest and most euphoric bull markets we have experienced, and it’s about to end…
Take a look at the chart below:
At first, this may seem like a chart of the stock market, peaking in 2000, 2007 and at a possible peak today.
The chart actually represents margin debt growth since 1995, based on data from the NYSE — and it tells us that the amount of people who are extremely bullish is at an all-time high.
Why Margin Debt Matters
By definition, margin debt is an investor investing more funds than his account physically has. In other words, he is borrowing money to buy more stock.
When margin debt climbs like it has since about 2013, it represents the type of irrational exuberance needed to push stocks to unsustainable levels — levels that are associated with stock market bubbles that ultimately lead to a collapse.
As investors leverage their accounts to historic levels, as shown in the margin debt chart, they are essentially more bullish than they have ever been during this so-called hated bull market.
Simply put, this is not a hated bull market.
Just think about it: You would never go out and borrow money to buy a house to flip for a profit if you anticipated the house falling in value. When masses of investors use margin to buy stocks, they are expecting stocks to continue higher.
But for the past year, stocks have gone nowhere, peaking in July 2015.
This so-called hated bull market will soon be a hated bear market, and those left with overleveraged accounts are going to get wiped out.
The Bear Market Is Waiting
It’s easy to see how a new bear market could spiral out of control. Once losses begin to build up, these leveraged portfolios will experience substantial losses, and investors will need to sell at any price since they no longer have the capital to cover their margin positions.
As you can tell from the chart, when margin debt rose sharply in 2000 and 2007, symbolizing exceedingly bullish investors, a stock market crash was imminent.
Looking at today’s level of margin debt, we see a similar surge during the past few years, which leads me to believe we are near another imminent crash.
The stock market is now at unsustainable levels.
All it takes is one trigger to spark the kind of panic selling seen in previous stock market crashes, like the 2000 tech bubble bursting and the 2007 housing collapse.
Who knows what will spark the next collapse? It could already be under way with the latest Brexit vote, but only time will tell.
For now, make sure you are prepared for the looming bear market.
Editor, Pure Income