The market has been on a tear to all-time highs. The S&P (SPY) closed yesterday at 1597.55, its highest close ever. Yet, at the same time there are assets which are trading as one would expect they would under great loads of leverage.
Such was the case with Apple (AAPL). Back in September 2012 Apple was the largest stock in the market. At $700 it had a market capitalization of $657 billion which gave it the largest weight on the major equity indexes. This weight approached 20% on the Nasdaq 100, for instance. It was quite incredible that the heaviest-weighted stock could plunge by nearly 45% in an environment where stocks gained all the way to all-time highs.
It didn't stop there. Gold (GLD) and Silver (SLV) did about the same. They too, plunged in the midst of a market high on monetary fumes. Precisely the kind of stuff that usually makes precious metals go on a bullish trip as well.
So what joins gold, silver and Apple? In a word, leverage. All of these assets had a loyal following and loyal followings, in the market, lever up. They believe their asset can do no wrong, and when an asset can do no wrong, you lever it up. While it's hard to find direct evidence of such happening with gold and silver, you simply know that an asset which commands such loyalty is bound to attract the optimists able to lever themselves up. As for Apple, it's been widely documented that leverage was in play, namely through the massive usage of call options.
What does leverage do?
Leverage magnifies the upside. If you buy an asset and lever it up two times and the asset goes up 50%, you make 100%. But it doesn't just magnify the upside, it does the same to the downside. If that asset goes down 50%, you lose your entire account.
Not only does leverage magnify the downside, but it also leads to something else: forced selling. When someone leverages up and the asset goes the wrong way, there's a point at which the selling decision isn't voluntary - it's mandatory. And there's more powerful to push an asset's price down than forced liquidation.
So what you saw in gold, silver and Apple had the looks of it. At some point the downside got so consistent, that in all likelihood it was provoked or helped by forced liquidation.
Why is this so relevant now?
There's something extraordinary happening. While gold, silver and Apple had the looks of having been exposed to the worst effects of leverage, and Apple was likely to have had the largest leverage (in absolute terms) in the whole market, after Apple got liquidated leverage should have seen some kind of reduction.
That's what makes the following statistic extraordinary. Margin debt in the whole market, notwithstanding the Apple, gold and silver liquidation, kept going up as we can see (Source: NYSE).
So at the end of March, margin debt stood at $379 billion, just shy of the $382 billion attained at the top of the credit bubble, back in 2007. And it hit these levels in spite of the gold, silver and Apple liquidations - all assets likely to have inflated the margin debt statistics, and now likely to be home to much less leverage than before.
In short, we're near margin debt records attained at the top of a clear bubble, even in spite of margin liquidation in some of the most levered up assets.
Even though the Federal Reserve keeps propping up the market, margin debt has expanded to near-record levels consistent with elevated levels of risk. Gold, silver and Apple have already illustrated what such risk can do even in the midst of a propped up market. The rest of the levered up market probably isn't immune to such risk either.
Moreover, since gold, silver and Apple were probably amongst the most levered up assets and were already liquidated, it's quite likely that the leverage in the market ex-gold, silver and Apple already exceeds the historical record attained during the credit bubble. So risk now, from this perspective, seems even greater.