Massive stock market leverage unfolds amid brutal bloodshed

Margin debt started falling a month before the Nasdaq headed south, and it’s still falling.

By Wolf Richter for WOLF STREET.

The total amount of leverage in the stock market is unknown and takes many forms. The only form that is tracked and reported monthly is margin debt. Other forms, such as Securities Based Lending (SBL) and leveraged hedge funds at the institutional level are not followed. Even the banks and brokers that fund this leverage don’t know what their client’s total leverage is across all brokers combined, which became clear when the family office Archegos imploded in March 2021 and wiped out billions of dollars of capital at major brokers who had provided the leverage.

But margin debt — the tip of the iceberg and indicator of the direction of overall stock market leverage — fell $27 billion in April from March, to $773 billion. , according to Finra, which obtains this data from its member brokers. Margin debt peaked in October last year at $936 billion and began to decline in November. In those six months, it fell $163 billion, or 17%. But the leverage is still huge, and the outcome still has a long way to go:

Not included in today’s margin debt data is May. So far in May, the S&P 500, despite today’s rally, has fallen 6.2% and the Nasdaq 8.3%, and many imploding stocks have been brutally crushed in those two weeks, including Coinbase, whose huge, gigantic rally since Thursday morning hasn’t It’s no fly compared to the devastating fall of the previous two weeks and since its IPO and is barely visible on the staircase to the devil since the IPO.

These types of sell-offs trigger large periods of forced selling among fringe stock jockeys who have focused on these stocks.

Hundreds of stocks plunged very large amounts, 70% and 80%, and even over 90% in a rerun of the early Dotcom Bust, only bigger and wider, and it goes stock by stock, and it started in February last year, and kicked off in earnest in November, and some of those I captured in my Imploding Stocks special.

Here’s a sampling of well-known names amid the brutal bloodshed. The percentages range from their highs through the May 13 close:

  • Carvana: -90%
  • Vroom: -98%
  • Rivian: -85%
  • Snap: -70%
  • Pinterest: -76%
  • Netflix: -73%
  • Wayfair: -84%
  • Softness: -78%
  • Shopify: -77%
  • Teladoc: -89%
  • Lyft: -77%
  • Zoom: -79%
  • Palantir: -81%
  • Game Stop: -80%
  • MAC: -84%
  • Coinbase: -83%
  • Zillow: -81%
  • Red fin: -88%
  • Compass: -75%
  • Door open: -82%
  • MicroStrategy: -85%
  • Robin: -87%
  • Modern: -72%
  • Beyond Meat: -87%
  • Platoon: -90%
  • DoorDash: -72%

Leveraged investors in these instruments had to cut their margin as their collateral values ​​disappeared into the ether, sometimes overnight, turning these investors into sellers forced to raise the cash needed to repay their margin debt.

A fringe investor who was heavily focused on these stocks and did not abandon them in time could be wiped out and may consider joining the labor market to help address labor shortages.

Margin debt peaked in October. The Nasdaq was a month behind and peaked in November. Since then, margin debt has fallen 17% and the Nasdaq 27%. And in terms of stock market leverage, that’s the tip of the iceberg.

When many investors use leverage to buy stocks and the leverage increases, it creates buying pressure with borrowed money, fueling heat in the market.

But when investors are pressured due to their leverage and the disappearance of collateral values, they sell stocks, which creates selling pressure.

This is how stock prices and margin balances are related. High leverage in the stock market is a precondition for a spike in stock prices and a precondition for a selloff, which then unwinds that leverage. It takes leverage to go to those kinds of extremes.

Debt on margin and market “events”.

The trick is not to get distracted by the absolute dollar amounts over the decades. They don’t really matter. What matters are the sharp increases in margin debt before the fairsand the sharp declines during the fairs. The chart shows the relationship between margin debt and “events” in the S&P 500 index.

But nothing compares, in dollars or percentages, or in sheer beauty, to the near vertical spike in margin debt from March 2020 to October 2021, during the $4.7 trillion money printing spree of the Fed and the interest rate crackdown mania, and it’s all happening now:

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