Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
These rallies are becoming familiar. In early July we saw a streak of 12 of 13 sessions in a row up, early September 11 of 12, and mid October 11 of 13 (current streak). It is a bit uncanny the similarities and how the escalator goes straight up in vertical ascent as we see indexes come out of mini corrections during QE. So we are about at the same stage where the last two began to tire, so it will be interesting if this is similar or if the current consensus of the market that there is nothing to worry about until next year as the Fed and D.C. are both off the table and this 3% annual growth rate in earnings we are now seeing in the S&P 500 year over year deserves even more multiple expansion. 2013 has not been the year of significant earnings growth – it has been nearly all about multiple expansion.
Obviously with this sort of move we are not even sniffing the 10 day moving average.
Speaking of vertical, we are seeing the same signals in margin debt as in 1999 and 2007. Doesn’t mean it will matter anytime soon as the Fed disengaged after Y2K and wasn’t at all involved like this in 2007, so we are in uncharted territory but people are certainly buying in – with leverage.
Margin levels, or the amount borrowed to purchase securities, climbed to a new record of $401 billion in September, according to NYSE Euronext data released this week. The monthly increase of 4.78 percent was also the largest gain since January. Prior to the financial crisis, debt margins peaked at $381 billion in July, 2007, three months before the S&P 500 hit an all-time high.
We had some high profile earnings moves last week such as Whirpool, Amazon, Microsoft, and Flowserve as shorts are mostly getting roasted on earnings. This week we’ll see Apple and Facebook – two of the most popular names in the market.
Economic reports have been completely ignored as there is not going to be any movement on the Federal Reserve with the 6.5% target and Yellen headed our way, and the holidays in between. So last week’s data points didn’t move the markets at all. So no reason to cover them. The Fed has a meeting this week, but as repeated earlier, nothing will change. It could create some short term volatility especially with the market so extended from support levels.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/index.php/the-fund/holdings
