The last two times when margin debt reversed and fell after a record-breaking spike, all hell broke loose. In 2000, it was simultaneous. In 2007, it was delayed by a few months. Today, on the surface, everything is still hunky-dory. The Dow is just fractions below its all-time high that it set on Wednesday. But beneath the surface, parts of the stock market are already coming unglued, and holders of momentum stocks have been eviscerated.
It isn’t the spike per se that matters, but when the spike reverses.
So in March – the New York Stock Exchange released the numbers Wednesday
evening – margin debt declined by over $15 billion. Instead of plowing
$15 billion in barrowed money into stocks, as they might have during the
upward momentum of the spike, investors yanked out $15 billion – for a
difference of $30 billion compared to prior months. And that moolah they
yanked out doesn’t sit on the sidelines. It dissipated into thin air by
being used to pay off debt. The last two times that reversal happened,
the whole construct came tumbling down.
Parts of the market have already tumbled. Momentum stock
traders have taken a drubbing, and some of those who trade on margin
received margin calls and were forced to sell, and others dumped their
positions to avoid getting wiped out. It’s bloody out there, in momentum
stocks. They’re the ones that go first. And the last two times, they
didn’t go solo.
The Nasdaq Biotech Index had beautifully shot up along an exponential
curve. Then the hot air hissed out of it, and it swooned 21% in six
weeks. The index includes big players, like Biogen, not just startups
with big dreams and no drugs. After some buying on the dip, the index
closed on Thursday down "only" 15%. But that hasn’t saved smaller
momentum stocks: Exelixis is down 58% from its 52-week high and 92% from
its all-time high shortly after its IPO in early 2000; Halozyme is down
60% from its high in early January. And so on.
In the social media space, the bloodletting has been ugly. The Social
Media ETF SOCL is down 23%, but stronger stocks like Facebook (down 16%
from its high a month ago) paper over individual fiascos, like Twitter,
which has plummeted 48% from its peak last year to below its IPO price.
Other momentum stocks are getting annihilated: Amazon down 25% since
January, Netflix down 27% in just two months. From their peaks, Pandora
crashed 39%, Gogo 63%, and Imperva, a Big Data security outfit, 65%.
To hedge or to benefit from potential upcoming bear market, we can either buy put options on QQQ, SPY, DIA, or short them, or buy Bear ETF, symbols for Bear ETF are PSQ for Nasdaq 100, SH for S&P 500, and DOG for Dow
