THE Lines to Watch For a Collapse

For several months I’ve noted that the US equity market was entering a kind of mania that was indicative of a top forming.

In particular I noted:

1) Investors piling into stock-based mutual funds at a pace not seen since the Tech Bubble.

2) Margin debt (debt investors take on to buy stocks) at a record high.

3) Market leaders (Tesla, Netflix, etc.) showing clear signals of investor rotation.

4) Corporate profit margins at record highs and primed to fall.

5) Market breadth shrinking (meaning fewer stocks participating in the rally).

6) The VIX (a measure of investor sentiment) dropping to levels of complacency not seen since 2007.

7) Investor bullishness hitting record highs and investor bearishness hitting record lows.

8) Investment legends either returning capital to investors (Icahn, Klarman) or sitting on mountains of cash (Buffett).

In simple terms, the bull market of the last five years finally went into mania mode as retail investors stopped worrying about income (investing in bonds) and drank the Fed’s Kool-Aid: bought stocks.

Note, in particular, that the blow off/ mania component of the rally occurred when retail investors began to pile into stocks (as is always the case with tops).