Traders are borrowing more than ever to leverage up their bets on the stock market.
Some fear that this is a sign of a bubbly stock market that’s doomed to crash.
Others argue it’s a more benign coincident indicator and at least partially reflective of the increasing presence of hedge funds.
“It is in the scary zone,” said DoubleLine Funds’ Jeffrey Gundlach during a webcast on Tuesday. “If and when it hooks over, that’s when you’re likely to see a double-digit decline in market indexes.”
While he’s not predicting imminent doom for stocks, he encourages us to be on the look out for a reversal.
Gundlach has previously characterised margin debt as both a cause and effect of the market rally.
Margin debt could very well continue to rise with the stock market. But it has a nasty way of adding to the downward momentum when stocks sell.
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