Stock Margin Debt Reaches Record-High, Surpassing 2007 Pre-Crash Level

March 13th, 2014

by Michael Lombardi

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As key stock indices like the S&P 500 make new highs, bullishness increases almost daily, and stock advisors are saying buy more.

I am not surprised by this. All of these irrationalities tell us something very important: the bear is doing a great job of luring investors back into stocks as it gets ready to take their money away once again.

Dear reader, heed the warning signs of a market top…

Those who are very close to the companies in key stock indices are selling their shares at an extreme pace. According to CNBC, in February, insiders sold $5.3 billion worth of shares and bought roughly $268 million worth of shares; for every one dollar of stock they bought in February, they sold about $20.00 worth. (Source: "Insider Activity and Concentration by Industry," CNBC web site, last accessed March 5, 2014.)

According to the Vickers Weekly Insider Report, corporate insiders are more bearish on the stocks of the companies they work for today than at any other time since 2007. (Source: Market Watch, March 4, 2014.)

But insider selling activity isn't the only indicator that worries me about the direction of the key stock indices. We see problems in corporate earnings, as well.

The number of companies warning about their corporate earnings for the first quarter of 2014 continues to increase. So far, 84 companies on the S&P 500 have issued negative guidance about their first-quarter 2014 corporate earnings. (Source: FactSet, February 28, 2014.) Remember: corporate earnings, at the core, are what drive the key stock indices higher. Even analysts aren't very optimistic about corporate earnings, either; they are expecting first-quarter corporate earnings growth of only 0.7%. (Source: Ibid.)

Finally, the reckless buying of stocks is taking a very wrong turn: investors are buying with too much borrowed money. Please look at the chart below:

The chart above gives me more reasons to be bearish on the key stock indices. In January, margin debt on the New York Stock Exchange (NYSE) reached its highest level ever recorded, surpassing its previous record that happened -- yes, you guessed it -- just before the stock market sell-offs in 2007.

It's frustrating to see key stock indices keep pushing higher when historically proven market indicators are all warning of a crash ahead. Irrationality is exuberant to say the very least, and that's why I believe this rally is counting its last days.



Originally posted at Profit Confidential

© Michael Lombardi, MBA

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