Why are so many investors on the WRONG SIDE OF THE MARKET when the market takes a significant turn?

Investors have been asking for ways to use leverage on the long side of the market for quite some time.

In financial history, when NYSE margin debt levels reach all-time highs, it indicates that a bull market is reaching the end of its run.

The stock market peaks of 1987, 2000, and 2007 are notable examples of this phenomenon.

According to a Barron’s report published on December 3:

Traders’ margin debt, which is the amount of money they have borrowed to acquire new shares while using their existing stock holdings as collateral, has reached a level that is on the verge of becoming an all-time high.

It is now worth $936 billion, representing a 40% increase over the same period last year.

At the same time, investors are accumulating record amounts of positions in leveraged long exchange traded funds (ETFs) (ETFs).

Our December Elliott Wave Theorist has provided the following chart and commentary:

In the greatest leveraged long index funds, the total quantity of assets (measured in billions) is the largest.

Exchange-traded funds (ETFs) are mutual funds that trade on the stock market based on a basket of companies.

People are pouring money into them in record numbers.

The amount of money currently invested in leveraged long ETFs is depicted in the chart.

Some of these investors are placing bets on the stock market going up by a factor of 2:1 or even 3:1. The most recent amount, as of December 8, stands at $43 billion, setting a new all-time high.

This bullish extreme has only gotten more intense in recent weeks.

This is taken from a Bloomberg article published on December 15:

Earlier this month, Leverage Shares announced the launch of an exchange-traded note in Europe that aspires to produce five times the return of the largest ETF tracking American technology stocks.

The Leverage Shares 5x Long US Tech 100 ETP (ticker 5QQQ) leverages the $205 billion Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100 Index, to increase its performance.

Increased leverage on the long side has been requested by several individuals.

Inevitably, this “new — and radical technique to improve returns” during a bull market comes with a negative side effect: increased losses during a bear market – something that many investors don’t appear to be concerned about at all.

Why are so many investors on the WRONG SIDE OF THE MARKET when the market takes a significant turn?

Here’s why: At large bottoms, the news is always negative, and at major peaks, the news is always optimistic.

As a result, many investors anticipate that negative news will lead to even lower prices, and that positive news will lead to even higher prices in the short term.

However, the news is not a predictor of future pricing; rather, it is a reflection of what has happened in the past.