Are you saying this time its different ? That is always the hallmark of a top.
mutual fund cash levels are near record low levels..... something like 3.7%
someone else can chime in but aren't margin levels at danderous levels as well?
I don't think that margin and mutual fund cash levels mean much any more.
If you can hedge cheaply, why do you need cash? If you are punished for underperforming the market and you can borrow to meet liquidation requests, why would you hold much cash?
And with all the derivatives and deals (requiring arbitrage), it's not at all surprising that margin debt is super high. It's necessary. It's not, in my opinion, necessarily showing ANY excess speculation. I mean, it MIGHT be, but we don't really know. We DO know that there are a lot of things that are making margin debt look big that don't actually imply wild speculation.
Mark
There's a difference, zedor. A subtle one that you may have missed.
At least with regard to mutual fund cash, it's not different this time; it's different period. It has changed fundamentally in it's nature. It'll aways be different from what it was.
The "it's different this time is always a sign of a top" riff is an interesting one. A lot of bears used to trot it out in the 90's as the market went higher and higher. It's one of the LEAST useful markers of tops or bottoms.
I mean, things are ALWAYS changing. Sometimes a lot, sometimes in non-meaningful ways. E.g. Breadth changed quite a bit with decimalization. Back in the 90's the Coppock Breadth indicator changed dramatically in it's utility. If I said that you should ignore your Sells from Sedge's Timing Technique for Texas Traders (the CBI) because breadth is different now, would you have said it was a sure sign of a top? If so, you would have missed a lot of years of rally. I'd say, NOT a good marker.
Similarly, margin debt has always been a measure of speculation, but also it has been used to fund arbitrage, which is not speculation in the sense that it's not dependent upon the market's direction. In the past, there have been a relatively small number of deals. Today and for some time now, we've had a ton of buy outs. In point of fact, high margin debut, rather than being a Bearish sign of speculation, might well now be a BULLISH sign of a diminution of the supply of stocks.
But, maybe I'm wrong. How would we know? Well, we'd look for other signs of wild speculation. Hearing any stock talk from your barber? How about your mom (or other unlikely candidate)? I haven't. What about AAII? Ooops! No bullishness there! Equity options players? Not much there, either! Rydex may be showing some lack of Bears, but that's hard to measure accurately. I do know that while we're seeing some Bull fund buying, it's still well away from excessive levels.
So, it would seem that in principle, things are working as they have, but these two measures are deceptive in their appearance. You don't want to be hanging your hat on just them without confirmation from similar indicators.
Mark
