Margin Debt Signals the Peak While this bull market has been generally considered one of the most unloved bull markets, margin debt doesn't support such a claim. Paulies Patent Margin debt has been extremely strong, meaning investors are willing to overleverage their accounts to participate in the bull market. There is no doubt has the Federal Reserve has fueled this bubble. Interest rates stuck near zero have enticed investors into risky investing, as margin costs are kept low. Throw in the fact that investors are seeing almost nonexistent gains from risk-free accounts, forcing them to dive into stocks in order to find a decent yield, and you have a dangerous cocktail of heavy market exposure. With investors at their most overleveraged point in history, stocks have begun to correct. The past few days have surely lowered investor confidence in this bull market, and margin debt has likely peaked.
When margin debt peaks, it is accompanied by a peak in stocks, followed by a 50% or more plunge. Broad stock markets have fallen a little over 10%, so there is plenty of room to the downside, and the completion of the stock market meltdown. Own Insurance? If you have been following my daily articles, you would have been taking some cash off the table as we approached this massive stock market meltdown. I have been keeping my portfolio light to take advantage of the sell-off and minimize its impact while offsetting some of our positions with protective put options, which limits our downside exposure. But the best thing you can do today is make sure you have protection in place for your portfolio. If you haven't purchased any downside protection such as a put option, you need to do so as an insurance policy. You will end up paying more for it today than a few weeks ago, but it will serve a similar purpose, to protect you from another 40% to 50% drop that may be inevitable over the coming months.
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