Capitalogix Commentary 02/28/11 - Margin Debt and Confidence Are Both Rising Sharply

NYSE Margin Debt Gives a Clue As To How Bullish Traders Have Become.

This week's Trader's Narrative Sentiment Overview notes that margin debt is rising sharply as traders and investors increasingly take a more aggressive posture.

110227 nyse-margin-debt-feb-2011

Every month, the New York Stock Exchange (NYSE) releases numbers showing how much money was borrowed on margin to buy stocks on the NYSE. As you can imagine, the amount of stock bought on margin is extremely large, but the total number fluctuates quite a bit based on how confident traders are. When stock traders are confident, they borrow more on margin. When stock traders are less confident, they borrow less on margin.  Clearly traders are becoming more confident.

Historically, How Does the Market Handle Doubling Within Two Years?

Confidence is good, right?
 
Mark Faber, the author of the Gloom, Boom and Doom Report, explained to CNBC that the US stock market has now doubled from its low. Moreover, he points out that there have been only three occasions in the last hundred years when the stock market in the US doubled within two years.

One such occasion was in 1934, coming off a "very deeply oversold condition" in 1932 and the other one was in 1937. After 1937 and 1934, the 12 months return were both negative, Faber said. 

Here is a chart showing 102 week rolling returns for the S&P 500 Composite Index.

 

110227 102 Week Rolling Returns
These levels of gains have preceded significant pullbacks.  Here is a table showing the detail.

110227 Table-of-SP-102-week-rolling-returns
This is simply a historical look at similar rally intensities.  Nonetheless, Faber warns: "I would be a little bit careful here to just buy the US because investor sentiment is very positive. The volume has been relatively sluggish and the market is extremely overbought by any statistical model".

Price is still the primary indicator.  Let's see if traders buy the pull-back?

Business Posts Moving the Markets that I Found Interesting This Week:

Lighter Ideas and Fun Links that I Found Interesting This Week

Enhanced by Zemanta

0 Comments
  1. Warren thinks like a owner of a business, he doesn’t sell as long as he thinks the business is viable. The past history also shows that their conviction usually applies to businesses they have majority ownership in and not to all. While the author is right to point out that Warren is not pointing out the other possibilities, he should also observe that warren did not ever say that the other possibility won’t happen.

Leave a Reply to buying stocks Cancel reply

Your email address will not be published. Required fields are marked *