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Rarefied Casino Behavior

CAMS Weekly View from the Corner – Week ending 4/23/21

April 26, 2021

It seems to be hardwired into the collective human conscious to press harder when a winning streak is on trend.  The longer the trend, or equally, the more rapid its ascent seems to embolden people at large to place more chips on the table thinking the run will not end, or, in fear that it will, to load up as much as possible while the winning streak is in play.  As the streak continues the psychological view morphs from “get it while it lasts” to “hey, this will never end” so upping the ante as much as financially possible becomes the usual behavior. In markets, upping the ante as much as financially possible is known as leverage.  As the uptrend continues and becomes seemingly bulletproof (it always proves to be imaginary of course when history is consulted) collective market participants press their view by offering it is time to “lever up!” Margin Debt Margin debt is debt a brokerage customer takes on by trading on margin. When purchasing securities through a broker, investors have the option of using a cash account and covering the entire cost of the investment themselves, or using a margin accountmeaning they borrow part of the initial capital from their broker. In markets the levering up process customarily entails margin debt with the operative word being debt.  Debt is the key player anytime a household, business or other entity wants to lever up their Balance Sheet in hopes it will juice their Profit & Loss Statement (P&L) to the upside.  The process allows said entities to control a lot more capital than they would be able to otherwise. On the upside of said trends the process works magically for the P&L as the financial leverage juices returns far greater than could ever be experienced with merely using one’s own available capital to participant in the market.  On the downside the levered P&L turns disastrous and the Balance Sheet becomes notably different to the negative.  Said differently, money goes to money heaven fast – like it never existed type of fast.  Poof. Our current market environment is offering consistent signs from unrelated areas that we are in full casino mode.  The bets are being placed with seemingly complete confidence that the uptrend is bulletproof (not just long lasting but eternal) and leverage is the go-to because, well, the uptrend is viewed as bulletproof right.

The chart above and below comes via The Chart Store ( with a dive into the collective market view via margin debt.  Above is a decade view of the annual rate of change for margin debt (orange line) with the annual rate of change for the S&P 500 (black line) overlaid together.  The ease to which the orange and black lines have exceeded the red horizontal line emphasizes we are in full throttle mode and truly are doing that which we have not done in the previous decade. In addition, note how the orange line (margin debt growth rate) is exceeding the growth of the black line (S&P 500) to the likes of which we have not come close to in the previous decade as well.  Hence, the full throttle description.

The above chart is the same as the first only longer in duration. This goes back to the early 1940’s for a much broader perspective. By looking at the orange line only (margin debt growth rate) we see via this 80 year view that the tremendous growth rate threshold of 60% has only been achieved a handful of times. In each case, a southbound retracement of note followed. This is not to say this cannot go higher as history tells us it certainly has. What it tells us in spades is we are living some historic times in market leverage growth rates and speculation. Lastly, speaking of historic, focusing on the black line (S&P 500) we see our current annual growth rate has only been matched one time in the previous 80 years and never exceeded. We truly are in rarefied market air relative to margin debt and stock market annual growth rates. This does not mean the stock market will crash imminently. What this informs us of is this market and its collective participants may believe the run is bulletproof and eternal. Market history informs us that no market run is bulletproof or eternal. We should all keep that in mind. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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