The One Thing That Will Halt The Market’s ‘Raging Mania’ Is Leverage

Remember that tune by one hit wonder Buster Poindexter — Hot, Hot, Hot. It was played on every Carnival Cruise CCL.U and at every wedding in the 80s and early 90s. That’s the stock market’s theme song. Two days down are not enough to kick retail investors touting stocks on Twitter with Barstool Sports millionaire David Portnoy out of the conga line.

First, keep in mind that the Fed’s not going away. It’s not going to let the market tank like it did in 2008-09, leaving retirees to watch their 401(k) plans get cut in half. They had no job. They were not reinvesting. Jerome Powell said he will do whatever it takes as Fed chair to keep markets alive in the middle of a pandemic, where many people lost wages, and livelihoods.

The vaccine’s not going to do it. AstraZeneca said today that it was doing routine safety checks on its vaccine after a trial patient had adverse neurological symptoms, putting the breaks on Operation Warp Speed. The stock was down nearly 2% in the pre-market.

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The one thing that will halt the market is excess leverage. It doesn’t matter who they are, pros or retailers learning the ropes of an E-Trade margin account. Once they see the 10% loss in the Nasdaq NDAQ is really a 20% loss, at the minimum for retail margin accounts, they will back off. The bear, at long, long last, will come out of hibernating.

At the professional investment firms, risk management systems are not kicking in yet and forcing deleveraging. Both the S&P 500 and the Nasdaq are up again this morning. The MSCI Emerging Markets Index is also up just under 1%.

“The question is what will kill this trade if excessive momentum doesn’t do the trick,” says Sebastien Galy, senior macro strategist at Nordea Asset Management. He said they had believed that excessive momentum would push major indexes and the big tech stocks far into overbought territory and people would take profits.

Or if momentum was lost, and investors were buying with debt. That’d be another reason to get out There were more reasons to sell, than buy over the last week.

 Stanley Druckenmiller says the U.S. stock market is in a bad case of “raging mania”. (He should take a look at China’s A-shares. Here it is….)

“Everybody loves a party but, inevitably, after a big party there’s a hangover,” Druckenmiller, CEO of the Duquesne Family Office, told CNBC’s “Squawk Box” on Wednesday morning. “Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. (Tesla TSLA and Apple AAPL did one last month.) Companies then go up 50%, 30%, 40% on stock splits. That brings no value, but the stocks go up.”

Galy remembers similar raging mania and what stopped it dead in its tracks.

“It was in the U.S. housing market,” he says. “Another trigger is when liquidity is tightened with forward (interest) rates moving higher in the U.S.” Other than leverage, he said inflation can stop this rally cold, but no one sees that coming until 2022 at the earliest.

Oh, and then there are stocks like Tesla trading at 800x earnings. Or coronavirus vaccine play AstraZeneca trading at 68x while India’s generic drug maker Dr. Reddy’s Laboratory is trading at half that, 37x.

“The last thing that can kill a rally is valuations even the most ardent tech investor won’t believe,” Galy says.

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