As investors’ bullish sentiment moves up to euphoric levels, the markets are reaching extreme leverage. This is terrible news because a lot of people are going to lose one heck of a lot of money. According to CNN Money’s Fear & Greed Index, the market is now at the “extreme greed” level and if we go by Yardeni Research on “Investor Intelligence Bull-Bear Ratio,” it’s also at the highest ratio in 30 years.
But, of course… this time is different. Or is it? I continue to receive emails and comments on my blog that the Fed will continue to prop up the markets forever. Unfortunately, there is only so much the Fed can do to rig the markets. Furthermore, the Fed can’t do much to mitigate investor insanity in record NYSE margin debt or the massive $2 trillion in the global short volatility trade.
The $600 billion in NYSE margin debt suggests traders have racked up a record amount of margin debt (33% more since 2007) and the largest short volatility trade in history. By shorting volatility, investors are betting that the VIX Index (Volatility Index) will continue to move lower. A falling volatility index suggests more calm and complacency in the markets.
So, the market will likely continue higher and higher, until it finally POPS. And when it does, watch out.
I’ve put together some charts showing the extreme amount of leverage in the markets. While this leverage may increase for a while, at some point the insanity will end in one hell of a market correction-crash.