There Are a Couple of Things Not Coming Together Here

I Get it: Stock-Market Shorts Sit on Sideline, Fearing Rally. Investors Deleverage, Fearing Sell-Off. VIX Falls Asleep, Fearing Nothing.

Of the total shares outstanding of the SPDR S&P 500 ETF, only 2.6% were out on loan to short sellers this week, the lowest since early October 2018, and down from 7% during the summer, according to IHS Markit data cited by Bloomberg. Meaning that short-sellers who want to short the entire market, and not specific companies, are worried that the market will break out, powered by a Brexit deal or a miraculous US-China trade deal as per presidential tweet, or whatever, and rip their faces off if they’re short the market.

There are many forms of shorting the stock market. Short interest in the SPDR S&P 500 ETF serves as sentiment indicator about short bets more generally.

When short-sellers are not interested in shorting the market because they fear a potentially ruinous rally – that is a sign of stock-market optimism.

The last time short interest in the SPDR S&P 500 ETF was this low was in early October 2018, just when everyone was preparing for lift-off and the Santa rally and what not, and short-sellers didn’t want to be caught on the wrong side of the trade. But instead, all heck broke loose.

It turned into the worst October anyone could remember, and a near-20% sell-off of the S&P 500 Index by Christmas.

Short sellers borrow shares to sell them high, hoping for prices to drop so that they can buy them back later at a lower price, return them to their owners, and pocket the profit. They have to buy back those shares at market price in order to close the trade. When short interest is very high, this means that short-sellers who want to take profits after shares have plunged end up buying shares massively as shares are plunging, and they put a floor under the market.

But when there is little short interest, because short sellers are afraid that shares could surge and rip their faces off, that floor does not exist. And this is what happened last October. The market started dropping on little short-interest, and short-sellers weren’t around to buy back their shares to take profits.

Instead, short-sellers piled into the market to short the falling market as the month went on, and continued to do so through December before short-interest began to decline in early 2019.

Conversely, when short interest is low, as it is now, there isn’t going to be much support from short-sellers when shares do rise. Shorts would lose money on a rising market, and they have to buy shares to get out from under their trades, and this can trigger very sharp short-covering rallies. But with short-interest low, this isn’t going to happen on a large scale.

But it’s not that simple. Short-sellers are speculators that take big asymmetrical risks. There is another class of speculators, but they fear a sell-off and they’re deleveraging:

In September, margin debt – the amount individuals and institutions borrow from their brokers against their portfolios to increase leverage – fell by $9 billion from August to $556 billion, according to FINRA today, after having already dropped $37 billion in August, which puts the margin-debt level back where it had been at the end of December 2018, after the historic plunge in margin debt during the October-December stock-market rout.

At the end of last month, margin debt was down by $92 billion, or 14%, from a year ago, and down by 17% from the peak of $669 billion in May 2018. These investors are deleveraging.

Over the long term, the patterns emerge. Obviously, with a chart spanning decades, such as the chart below, the absolute dollar amounts are less relevant since the purchasing power of the dollar has dropped over the period. What is important are the movements, and how they relate to stock market events, which I indicated in white.

Margin debt is now back where it had first been in April 2015:

There are many forms of stock market leverage, but margin debt is the only form that is reported on a monthly basis. So it serves as a sentiment indicator of stock-market leverage.

This leaves us with conflicted sentiments in the market:

  • On one hand, short-sellers fear a rally – market optimism – and so they don’t short the market, though they might short individual stocks for company-specific reasons.
  • On the other hand, investors are deleveraging because they fear a sell-off and don’t want to get hung out to dry.

This raises a question. Why is one group of risk-takers fearing a rally, while the other group of risk-takers is fearing a sell-off?

In this market that has been coddled for so long, and where fundamental considerations have long gone out the window because they’ve become irrelevant, maybe it’s the fear of the next surprise that can go in either direction, whether it’s a tweet or a Chinese announcement or something spreading from a tangled-up repo market, or whatever.

But even “fear” may not be the right word because the CBOE Volatility Index (VIX) is bouncing along at very low levels, below 14 at the moment, where “complacency” rules, and almost as low as early October last year, just before all heck broke loose.

“Does that mean that we have bad markets? Read…  ”Why Banks Didn’t Lend to the Repo Market When Rates Blew Out: JPMorgan CEO Dimon

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  131 comments for “There Are a Couple of Things Not Coming Together Here

  1. Keepcalmeverythingisfine says:

    I’ll take a shot at this: Fed is pumping liquidity into the market to control overnight rates, shorts don’t like Fed’s liquidity, hence lack of short positions. Meanwhile, IPO market is stone cold, hence leveraged positions on margin are pulling back.

    Do I win a beer mug?

    • NotMe says:

      The stone cold IPA, I mean IPO market means less money to invest from the deleveragers and pump the market.


      • joe saba says:

        unless I am warren buffet – which I am not
        I have no intention of ever buying anything wally street, bankster or biggy insurance

        all in all they are 1000% ponzi scheme by 1% for the 1%
        until I get 51% CONTROL of asset I don’t want it

      • Saltcreep says:

        Hey, NotMe, maybe Prost is your proper beer related German word? Prosit is what Scandinavians say when someone sneezes.

    • John S TRUDGIAN says:

      The wheels are coming off the growth story, but the authorities can’t allow the market to sell down. Call it pre-emptive intervention.

    • HR01 says:


      Short interest is only measuring part of the equation. Options positions being the other part.

      No telling how many institutions are laying off risk via selling covered calls on existing positions. That would be a bearish outlook but won’t be reported anywhere.

      • Wisdom Seeker says:

        Regarding options, there’s a readily available metric, the CBOE put-to-call ratio. It shows nothing particularly unusual going on. The 50 day average has been uptrending slowly since April and is actually already at the levels of early December 2018. Comparing against Wolf’s data I’d guess that short-sellers are heavier into puts right now than outright shorts. Might make sense if you figure the opportunity is event-driven and therefore has a defined timeframe. Costs less to lose 100% on a few puts than potentially get your face ripped off with an outright short.

        But the current levels are well within historical norms, though more typical of times of market “concern” than raging bull markets. On the other hand, if the 50day average of the put-to-call ratio starts to drop from here, that’d be consistent with the start of a bullish run.

        Looking at the shorter term, the 5 day average just bottomed due to a large spike on Friday, cause unknown to me.

        Personally I think the career risk for fund managers is to be caught short going into a traditional year-end rally. I’m almost tempted to speculate that the late-2018 plunge was engineered to deliver a really strong 2019, so that certain elected officials could tout the amazing stock market on their achievement lists during the 2020 election year…

        • HR01 says:


          P/C ratio not a reliable indicator without knowing whether the options positions are long or short.

        • Wisdom Seeker says:

          @ HR01, I don’t understand. For every buyer there is always a seller, for every long there’s always a short. Taking the market as a whole, there’s no such thing as “options positions”. The question you seem to be interested in is, who’s on which side of the market. But that’s not relevant here. The put-to-call ratio has a long pedigree of reflecting greed and fear in the market – just compare the chart with the market indexes.

    • Eastwind says:

      My take:

      Due to their different time horizons, short-sellers and investors who take long positions are looking at different indicators.

      There is a lot of FUD about economic prospects over the next year, and fundamental indicators show the market as overvalued. That sort of data should deter a lot of long-term investors.

      Shorts are reluctant to gamble for the reasons you mention, not least being fear of the next “tuit du jour”.

    • mike says:

      What I wonder is who is profiting from this as they have profited from other circumstances to the tune of billions of dollars? See Vanity Fair article:

      I guess insider trading has gone big, and the SEC is carefully putting its hands on its ears and a blindfold, so it does not see the problems.

  2. Kerry says:

    Math tells us more QE is inevitable. No surprise here…

    • 2banana says:

      Nothing in the real world can rise exponentially over more than a short time period.

      It always hits a wall.

      • otishertz says:

        Nothing in the physical world can rise exponentially for long, I agree. In math things can rise forever (up to a limit haha.) Money supply is not bound by the physical realm. It is whatever it needs to be to transact what the political will demands right now. The rest is adjustments.

        The real problem is how wanton money and debt creation pulls forward demand by forcing transactions and speculation that both cause resource extraction at an accelerated rate to feed mindless consumption.

        • Lisa_Hooker says:

          In the words of one of the sages of the 20th Century:
          “To Infinity … and Beyond.” – BL

      • Wisdom Seeker says:

        I’m with otishertz. Money today is just credit, and numbers have no physical limits.

        So long as the central banks keep the rate-of-rise within bounds, we can have monetary inflation forever. The gamesmanship is over who can pump credit the fastest without destroying the credibility of the system.

    • Frederick says:

      You’ve become conditioned to actually believe that statement Kerry ? How sad

  3. 2banana says:

    Well, yeah.

    And cheap and easy money, ZIRP, bailout after bailout, destruction of 100 years of contract law, government guarantees on nearly all debt, not one banker in jail, etc.

    “this market that has been coddled for so long, and where fundamental considerations have long gone out the window because they’ve become irrelevant,…”

    Reminds me of the French Assignats days. And we all know how that turned out (or you can duckduckgo it).

  4. David Hall says:

    The dollar is falling.

    Some initial earnings reports have been positive.

    While China and India slowed, they have been reporting strong GDP growth. If poodle grooming counts towards GDP, some growth is vanity.

    • 2banana says:

      Some countries, such as Italy and Britain, include hookers and blow in GDP calculations.

      • curiouscat says:

        Makes sense. Why not?

      • timbers says:

        Thank God America is above that. Because we the U.S. include payment to health insurance corporations as additions to GDP even as our life expectancy falls because of it. And so, that means if America enacts the world wide recognized Gold Standard of health care – Socialized Medicine, MedicareForAll, Universal Single Payer health, free healthcare, care whatever you call it – our life expectancy would sore as would our economic output, yet Fed statistics would report decline in GDP. Go figure.

        • 2banana says:

          Many folks believe that money spent, except for hookers and blow, is all wasted.

        • otishertz says:

          Health care needs to move to the other side of the ledger.

          The public health should be a national resource, not a liability. We are perverse to accept the latter.

          The resource of the public health should be well guarded.

      • timbers says:

        Many people believe that government money spent on benefiting people like healthcare causes deficits and is socialist, but money spent on optional illegal wars of aggression doesn’t.

      • nick kelly says:

        Germany has installed meters in Hamburg’s (legal) Red Light district, to ensure the government gets its cut.

        • nofreelunch says:

          “I spent half my money on gambling, alcohol, and wild women. The other half I wasted.” — WC Fields

      • Dan Romig says:

        London, and the City of London are using an average of 23 kilos of cocaine per day as reported by Sky News on Saturday, 12 October 2019. That equates to well over a half a million doses per day.

        The sun never sets on the British Empire. Evidently, many of those in the money capital of the UK never set either.

    • MC01 says:

      Leaving China aside, I have long been tempted to write a piece about Air India to show how much people should trust the government of that country with economic data.

      But honestly what’s the point? The Indian government outright lied about Air India so many times it would get monotonous very fast. In spite of all the tricks and mystifications employed by the government Air India has a debt of $850 million as of this week, is being cut off by the India Oil Corporation (State-owned oil company) over a mountain of unpaid bills and crews are bailing out daily as even pay has started to arrive late.
      But our intrepid Western media are still uncritically reporting anything the politicians and bureaucrats in New Delhi are coming up with. Old-fashioned laziness or something more?
      I’ll let you decide.

      • Unamused says:

        But our intrepid Western media are still uncritically reporting anything the politicians and bureaucrats in New Delhi are coming up with. Old-fashioned laziness or something more?

        Your intrepid Western media is owned by corporations which have a vested interest in perpetuating the illusions of New Delhi, among others, and faux journalists are obedient. The Great Wurlitzer plays on, the accompaniment to the song of Sirens. Don’t listen to it.

        • MC01 says:

          Does anybody understand the word “sarcasm” anymore? *Sigh*
          For those who take everything at face value: of course this is laziness. Never attribute to malice what can be adequately explained by laziness, stupidity and plain old incompetence.
          Spending less than five minutes to read a couple of (free) aviation news websites? Wa too much work. Just paste and cut the press release.

          Of course those who want to believe The Stonecutters secretly rule the world from behind the scenes, I understand you: those guys have one catchy drinking song. ;-)

  5. R2D2 says:

    Historically, in past decades, when the (famous) US bond yield-curves first invert (Mar / Apr 2019), it averages 21 months until a US GDP recession bites.

    Based on that metric, you’re looking at Q1 2021 when the US finally falls into GDP recession.

    So… if there is a US GDP recession in Q1 2021, you should see the Dow start to peak around summer 2020, several months before, in anticipation of the Q1 2021 slowdown.

    * Q1 2019 = US bond-curves invert
    * Q3 2020 = US Dow peaks
    * Q1 2021 = US GDP recession starts

    Let’s see if the bond market gets it right :-)

    • Zantetsu says:

      The republican administration is setting everything up to tank in 2021. If democrats win, they will claim the drop is because of the democrats irresponsible fiscal policy. If republics win, they will claim it was inevitable and that they need to be kept in office as the only party able to cure the economy.

      • Unamused says:

        Typical historical experience of the last hundred years tells you that Republicans create the messes and Democrats clean them up by introducing social programs, some of them progressive. Republicans have wised up to it and have taken steps to make sure the next one sticks. They’ve been sloppy about externalising the costs, though, so it’s going to be interesting to watch.

        Don’t worry about me. I’ll be just fine.

        • Lisa_Hooker says:

          Hundreds of years of evidence shows that both Democrats and Republicans screw up the economy – just each in their own way.

        • Unamused says:

          Lisa, Hooker:

          Unemployment was 23 percent when FDR took office in 1933. It dropped to 2.5 percent by time the next Republican was in the White House in 1953. It climbed back to 6.5 percent by the end of the Eisenhower administration. It dropped to 3.5 percent by the time LBJ left office. It climbed over 5 percent shortly after Nixon took office, and stayed there for 27 years, until Clinton brought it down to 4.5 percent early in his second term.

          Your turn.

        • Petunia says:


          I am definitely unamused by your lack of historical vision. FDR had a low unemployment rate because when you are in the military you are employed, remember WW2. Likewise with Johnson, remember Vietnam. Eisenhower also had a low unemployment rate while he had troops in Korea, remember that, the rate increase at the deescalation of the conflict.

        • Lisa_Hooker says:

          FDR taught both parties of government BIG time deficit spending and both sides never forgot. I’m not comfortable with servicing 21 trillion dollars now. Wonder what it will be after Warren or Sanders or Cortez, et. al.

        • Unamused says:


          Your numbers don’t work. Your position is unworthy of refutation anyway.


          I’m not comfortable with servicing 21 trillion dollars now.

          Then 23 trillion next year will make you fairly fidget. Get used to it.

          The opinion that Republicans make a mess of the US economy, and Democrats clean up the messes, is from the right-wing Cato Institute. I am merely exploiting it.

          US Federal deficits decline under Democrats: Clinton was the last to have a budget surplus, according the Republican calculations. Deficits skyrocketed under Reagan, Dubya, and Cheeto Benito. Want graphs?

          The Great Depression and the last four US recessions all began under Republican administrations. Every Republican since Teddy Roosevelt has had one in their first term. When was the last time one began under a Democrat?

          Love the handle, by the way. It’s very Nevada.

        • d says:


          You nailed it girl

          BIG Military = SUBSIDIZED EMPLOYMENT and FALSE, REAL unemployment numbers.

    • Gandalf says:

      That’s just the average. Which means that in reality, the recession can start sooner or later than the average of 21 months. And the stock market doesn’t always hit a new high.

      In the dot com bust, the recession started about 7-8 months after the yield inversion.

  6. Mars says:

    I like days like today – add a few more Q’s P -15to25% or so, you’ll have to guess the expirations :), as Nasdaq goes up

    OK Pils in the mug.

  7. Wes says:

    Interesting information Mr. Richter. I remember watching the VIX drop into the low nines at the beginning of 2018. I was tempted to take a position but didn’t. The VIX did top out at around $30 the week on December 19 the same year. On December 29 it dropped to around $23 five days after the Christmas Eve market blow out. You would have had to really be nimble to catch the top on that one. The VIX peaked five days BEFORE Christmas Eve.

  8. Obiwanna says:

    Massive liquidity from central banks all over the world has been pumped into the world economy for decades. Additionally, oil has gone down in price, which should cause deflationary pressure. This leaves excess cash in the world market looking for someplace to go in search of returns.

    The Chinese economy is 2/3 of what their numbers claim, at best. Europe remains non-competitive, so there is excess money looking for a home. The US stocks are over valued, but US stock markets in general are better off than everywhere else.

    This pushes more investment capital into the US, across all sectors. But investors don’t see value. And short sellers don’t see an end to the irrational bidding up of US stocks. Shorts are fundamentally value investors looking at value of stocks, but they understand that markets can stay irrational longer than shorts can stay solvent.

  9. fromks says:

    Shouldn’t you plot margin debt as a percentage of GDP?

  10. Brant Lee says:

    Print dollars, buy gold, jack up the gold price to back dollars (while we still can).

  11. Ghostbuster says:

    I’ve noted in the last several weeks that both long calls and longs puts are losing value (good if you sold them!). The SPY options are particularly hard hit and implied vols are withering below historic volatility.

    Earnings season is typically a volatility surpressor, but this is something different. My guess is that the market is pricing in the upcoming rate cut (Option Rho is hit), coupled with the monthly $vix futures front month roll-over.

    This kind of ‘volatility meltdown’ happens all the time, and you may have been misled into believing low $vix is a buy signal for stocks.
    The below link goes into the monthly $vix opex expiration. Seems the $vix cannot be relied upon as a consistent measure of market fear. I’ve switched to using gold as a fear-gauge.

    What you have is a market driven by mostly share buy-backs supported by the Fed’s cheap money. So you get a market that staggers forward like Frankenstein, with no real conviction. When the market drops, it’s only to get more fools to short it. Note how the pull-backs in the S&P have become more shallow as the year progressed.

    The tape looks weak, like even the bulls are having trouble believing next years S&P profits will be increasing by 10%. I suppose that if the market does actually drop, there will be no shorts to support it this time.

    • Petunia says:

      The S&P earnings are based on an ever decreasing number of shares due to all the buybacks. They are showing you the earnings per share on a smaller number of shares dividing earnings YOY. The increasing earnings create higher profits, but they are not based on productivity. Fake Growth.

  12. kevin says:

    Its really simple. Most folks get it backwards and that’s why 90% of market participants lose money over the long-term.

    Shortists now are all waiting for the spike UP, before they plough in.

    I’m willing to make a daring prediction here.
    Just screenshot this and see if I’m right on this, or laugh at my prediction. Lets see who has the last laugh ;)

    There are 2 ways this market now will move:

    a) SPY, QQQ (which are both highly correlated… forget the Dow which is non-representative given that its price-weighted) and other broad market indices both in the US, Canada and core EU countries will plod along HIGHER and higher.

    This is to make the pain more pronounced for the vast majority who lost out to inflationary effects and were not invested for the past decade or so.
    These folks will watch the markets RISE ever so slowly with increasingly pained expressions on their faces.

    b) The market will then SPIKE Upwards at at unpredictable time.
    If all the current BAD news and trade wars cannot bring down this market, just imagine what happens when all these bad news eventually run its course and fade out.

    Now, when the vast majority watch with horror on the SPIKE Upwards in the markets, they will feel so much pain then, they will then invest all their chips or a big portion of their money into the markets….and then, this is the time when the market will CRASH big time and wipe out these mom-&-pop investors.

    The timing is uncertain but this will always happen because a big enough pile of cash always attracts predators.

    The vultures of Wall Street are watching with their AI-assisted computer algos to extract their pound of flesh whenever they see a big enough pile of money building up.

    c) Thats when the shorts will enter when the big crash comes, NOT before.

    However, a word of warning for those reading this: It does not mean you will make any profits if you short the market on its downside, because you have to have lots of capital and the stomach to weather the huge volatility of short-term whipsaws and margin calls, which will most certainly wipe out many of these shorts too.

    d) When all the shorts have lost most of their money, then and only then the market will naturally settle down since most market participants would have lost everything on the markets and hence there will be very little liquidity left.

    Then, these Shorts will watch in horror as the broad market indices really do crash and prove them right BUT at a WRONG timing, since by then, they have little left in their accounts to capitalize on it.

    In short (pun-intended), fence-sitters will lose, most shorts will lose too, and for the majority, its damned if you do invest ’cause you may get burned just when you invested, and damned if you stay by the sidelines cause the market will move slowly higher and higher until its so painful you do actually invest a material sum. lol

    • NARmageddon says:

      Kevin, that sounds about right to me. And as you say, mostly Wall St gets to profit from the crash. Being short as a individual investor with no insider knowledge and no insider real-time data is very dangerous.

    • otishertz says:

      What if your then is happening now?

    • Mike says:

      “If all the current BAD news and trade wars cannot bring down this market, just imagine what happens when all these bad news eventually run its course and fade out.”

      Good points but the bad news has not been resolved or gone away. The market rallied up on the pretense the trade war has somehow been put on pause. The Chinese have disputed this rosy picture painted by the US media, and are already trying to renig.

      Trump is busy with his various impeachment scandals, but once he gets a handle on those, you can rely on him attacking the Chinese via twitter at any time.

      And the US economy is slowing. Look at earnings from railroads CSX and UNP (read the conference calls). They had to fire hundreds to barely make earnings, and there is no bright out-look there. Firing working to make earnings will soon be repeated everywhere across the economy.

      Options are cheap now, so put on some long dated puts, as the market is going to roll over sometime in the next three to four months. Upside maybe 3100, downside 2500. I suggest you look at the price-volume trend of the SPY. The SPX was bid up on lower volumes since around 2500.

      Also, AMZN is likely being targeted for break-up, (separating their AWS from retail), and that will likely destroy the QQQ.

      The only fly in this bearish picture is how much the Fed will intervene. If they go hells to guns with QE, then the market will be saved for a time. Suggest you buy gold as a hedge for that scenario.

      • Gandalf says:

        “Trump is busy with his various impeachment scandals, but once he gets a handle on those” …


        Trump is a bottomless pit of scandals, waiting to be gouged open. And, slowly, with the Democrats in control of the House, they are being gouged open.

        The next Big One will be the revelation that Trump kept two sets of books on his businesses, done to cheat on his taxes:

        Remember how they got Al Capone? It wasn’t for murder or running rackets in Chicago, it was for cheating on his taxes.

        You can argue about what is and what is not “collusion” and “quid pro quo”, you can’t argue about dollars on an accounting spread sheet.

        • d says:

          The odd thing is the people who can, dont seem to want to.

          So either there isnt a solid case (Highly unlikely) or something else it holding them back.

    • Greg Hamilton says:

      You scenario sounds like what happened to Sears. Everyone was trying to short it and it would spike higher wiping the shorts out. Only after most of the shorts had lost everything did Sears go in the dumpster.

    • Petunia says:

      Why be short at all, you can just trade the vix. Place your bets.

  13. Niko says:

    1 hour ago I was describing exactly same to my wife saying.. it feels like half the market is anticipating massive crash and the other half massive rally. I have no idea which way will go as it all depends what news comes out but one can smell the fear and anticipation at same time.
    Glad it is not only me thinking along these lines. You backed this with data too so thank you.

  14. Northwest Resident says:

    We’re never more than one tweet or one Fed pronouncement away from a face ripping rally or a heart stopping plunge. Trump and the Fed are the primary market movers now, with China and ECB close seconds. If we can draw inferences from the past trends of the market moving statements and tweets we’ve witnessed over the last couple of years, one might be that they seem to WANT to whipsaw the stock market up and down in a relatively tight range. The seem to WANT to draw short sellers into the markets, give them a haircut and let them loose to try again. Anyone with a ten minute advance notice of Trump tweet content could make a killing in the stock market today.

    • Unamused says:

      Anyone with a ten minute advance notice of Trump tweet content could make a killing in the stock market today.

      With practice, six seconds.

      • Gandalf says:

        I am fairly sure that Trump has been tipping off his family and buddies in the stock market about his upcoming tweets. This ia a guy who views the Presidency of the United States only as a means to make himself as rich as possible
        This will all come out once he’s no longer in office and can’t bully people in the government around. It’s already starting to happen with the State Dept

        • Gandalf says:

          And, it’s not just me who thinks this is going on. Here’s a Vanity Fair article with a detailed look linking Trump, foreign events, and the financial markets

          There is so much corruption to unravel in the bottomless pit that is Donald Trump that it’s just mind boggling.

        • d says:

          ONLY Fairly sure.

          After the first market moving tweets of the Term it was an obvious private money printing machine. You can Guarantee P 45 and his family have made billions from his tweets. which will be completely untraceable.

      • Kenny Logouts says:

        I wonder if Trump types into the website window, and the web server see’s his ranting, well in advance of posting.

        Or if he prepares his posts in Office 365 online, with them cached, and MS is seeing them.

        Or all offline, written up in an offline app, and copied across?
        Still plenty of time for a web-app at Twitter to scan his posts before they’re public.


  15. Michael Engel says:

    1) Margin of debt : $550B x 8% = $44B plus between few brokers.
    2) SDS, QID are x2 bears used by most traders to short the large cap. If u short a stock your profit is limited up to 100% and u pay 8% on 70% of position value.
    3) SDS, QID are at bargain prices when the market at peak. If the market plunge, next Mon, SDS is a great value, but its risky,
    A sharp rally can destroy your investment.
    4) $VIX decay in rallies and thrive in a plunge. Volatility is there almost every day.
    Tranquility candle above a gap higher at the open, or little red candle below a gap lower hide volatility

  16. Nick says:

    It’s called stagnation. That’s worse than a plunging market.

  17. Otishertz says:

    There is no market. No efficient market hypothesis. No rational expectations theory. No Peter Lynch American Dream 60-40 buy hold till you eat cat food.

    I’m gambling scalping longs and buying long dated puts with the proceeds while puts are going down in price. The low volume is ominous. Practically every trade is is a day trade.

    Why did I go to business school when all I needed to trade was a ruler.

  18. Old-school says:

    This article is very timely for me. I only have 1 individual stock holding ‘PETS’. I bought because it had no debt and paid good 5% – 7% dividend. It had been $50 but fell to $15. I bought a lot between $15 and $20. At the low it’s short interest was around 70% and days to cover close to 20.

    The last 2 weeks have seen the stock spike on no company news as I guess shorts are trying to cover before earnings coming out Monday. Yesterday stock was up 5%. This is for a boring no debt dividend payer. Value wise it is just about at fair value now.

    It’s been a wild ride as the stock has been really dominated by shorts and if you are value investor it makes no sense, but you have to have the courage to say long term they are going to be wrong. I am really looking forward to see if a true short squeeze will develop as that is when things can get interesting real quick.

    Other interesting factor is one of the big algo hedge funds has 6 – 7% stake in the company so I guess they are trying to scalp pennies off the shorts and longs. Who knew investing could be so entertaining?

  19. Mark says:

    I can’t believe we still refer to them as “markets” ……..

    I mean, really

    (thanks unelected private Fed oligarchy ……)

    • Wisoot says:

      Exactly Mark. IMF 250billion crisis fund doubling. Market = buy sell. Fraud = dream up bank account = idealise buying power while jailing anyone else who copies. Do as I say Not as I do. So conditioned and mind controlled. So slave ish. Subordinate. When will the world stop being slaves to fraudsters?

  20. nofreelunch says:

    Not many people are factoring in the billions and billions dollars in of equities that will be sold by force to satisfy IRS mandated RMD requirements. Due the Baby Boomers 70+ age bump, these sales will be increasing every year for a while. Wonder what this number is now? My guess is that if you are 70+ and had to sell equities directly for RMD (or indirectly for rebalance after), you would not use that money to buy equities again. I am sure some are liquidating equities sooner to avoid forced selling in a down market. This “cash on the sidelines” isn’t coming back either.

    • Lisa_Hooker says:

      Most, if not all, of my RMD goes directly to the IRS. ;-(

      • Old-school says:

        I feel a little guilty about it but I have been able to structure my life to nearly eliminate the tax take. Not for everyone. Probably can be summed up in a few steps:

        1. No debt
        2. Low cost, low tax area
        3. Sell status real estate
        4. Start taking withdrawals at RMD rate at 50 to level load taxes
        4. Use software to develop long term income and tax plan
        5. Learn to slow down. Activity doesn’t mean prosperity for you, but might for society.

    • Nicko2 says:

      My mother just liquidated her 401k, took a bit a bite in the tax bill, but she seems pleased considering the growth.

  21. Unamused says:

    Stock-Market Shorts Sit on Sideline, Fearing Rally. Investors Deleverage, Fearing Sell-Off. VIX Falls Asleep, Fearing Nothing.

    Mr. Market doesn’t suffer from paranoia, dissociative personality disorder, Fed-fueled addiction, and delusions of adequacy. He actually enjoys it. And yet . . .

    His condition is terminal. Debt continues to increase faster than GDP. It’s what had to be done to to give the appearance of recovery from the 2008 debacle. It’s what has kept the ‘business cycle’ going long past its time.

    And it can continue only so long as the debt can be serviced. That’s why interest rates have been made to bottom out and burrow down – to allow all that debt to continue to be serviced. And yet, the Financial Singularity cannot be denied. It can only be delayed – with more debt. And that card has been played.

    As nightfall does not come at once, neither does oppression. In both instances, there is a twilight when everything remains seemingly unchanged. And it is in such twilight that we all must be most aware of change in the air – however slight – lest we become unwitting victims of the darkness.

    – William O. Douglas

    The vulgar crowd always is taken by appearances, and the world consists chiefly of the vulgar.

    Il Principe

    • Tom Pfotzer says:


      I enjoy your posts; I like a man with the courage to see what is, and a different sort of courage to speak aloud what he sees.

      Separately, the prose is icing on the cake.


    • HowNow says:

      “The first method for estimating the intelligence of a ruler is to look at the men he has around him.”
      ― Niccolò Machiavelli, The Prince

      Pardon me…

  22. Old-school says:

    I have an older widow friend who is 73 and appears to be in good financial shape. She has a vacation home with some debt on it and a new vehicle that is financed. I think she has done pretty well in the stock market.

    Sometimes we talk and I say you know I have made enough and don’t want to lose half my money any more in a bear market. I get the feeling she is pretty much all in and I kind of cringe. If we really have about a 60% drawdown it’s going to catch a lot of people unprepared.

    • QQQBall says:

      The one thing regarding potential drawdowns is the belief that you just ride it out; the market always comes back. What if the next move down takes a long time to come back? That would be the EOTW scenario for many including many retirees, early retirement types, etc.

  23. Iamafan says:

    What’s the difference between the market and a casino? Looks the same.

    • Wisoot says:

      Exactly Iamafan. Just as casino owners use their establishment for money laundering, those who type a few zeros on their computer banking screen and go unchallenged launder fairness equality respect for law and trust in the human race.

  24. Satya Mardelli says:

    Short sellers tend to be more sophisticated than individuals that use margin for leverage. I remember the bubble bursting about twenty years ago. The financial press had a number of articles about investors who had margin calls and couldn’t get the cash to the broker in time.
    So the brokers did what brokers do… they started liquidating the investors positions to cover margin requirements.
    Investors were complaining about their accounts losing 70-80% of their value in just a few weeks. Apparently these jamokes weren’t aware that leverage works both ways.
    Skilled short sellers understand their risks. It seems however that investors who borrow money to goose their returns are blissfully unaware of the risks involved in the use of margin.
    My guess is that the margin slaughter, aided by by short selling, will happen again.
    Morale of the story: avoid margin and tighten stops. Make sure you are standing real close to the door when the party concludes. Not everyone will get out alive.

    • Lisa_Hooker says:

      Stops? Stops? Don’t you love it when the price gaps down and doesn’t retrace to fill the gap before you are wiped out? Never hits your stop. In a fast plunge you can’t kill and reset stops fast enough. Unless you’re a broker.

      • Satya Mardelli says:

        Lisa – there are two ways to set a stop.
        A stop limit guarantees you a price but not an execution.
        A stop market guarantees you an execution but not a price.
        If your concerned about gap risk set the stop at the market. You might not like the price but it usually beats getting wiped out.

        • Lisa_Hooker says:

          I take it that you have never traded commodities and had a market open limit down and closed. Yup, the only way to stop the hemorrhage is sell at market (at any price). But if it’s limit down – no execution until the market opens. Lost a bundle on corn futures many years ago when it rained over the weekend and the market opened limit down on Monday and again on Tuesday. I learned an expensive lesson.

        • d says:

          There is another way to set brutal stop.

          Have two accounts that allow manual funds transfer between accounts,  trade in dangerous time with very low margin, margin call is stop.

          MUST HAVE account type with no margin debt, in event of margin call.

  25. John says:

    Thank you Wolf! A few thing come to mind. The Finacial Times and Martin Wolfe’s editorials leading up to the financial mortgage crisis. I new it was coming and didn’t know how to short it. Still don’t. I think it was puts on banks every month going out. Thank you for the article again.

  26. Prof Chaos says:

    Yep, If you have to finance it you can’t afford it; Well with the exception of a home.

    • Wisoot says:

      Except if you belong in a small group, you create your own finance. You can have anything you want. Imagine that. If you could have everything you want, if each individual had the power to create as much money as they wanted, would the world be a better place? Trust would return for a start. Think about it.

      • Wolf Richter says:

        “if each individual had the power to create as much money as they wanted,…”

        Then money would be worthless. Think about it.

        • Wisoot says:

          Social acceptance is a pre loaded human being program which would define moneys worth. This is why the creation of money is currently pegged to institutions rather than people. Although the same people in the clique group associated with these institutions benefit. Social pressure to be a philanthropic billionaire makes it acceptable. Carnegie understood that – is why he chose health aka big pharma – as a stealth mechanism of control – with its good intentions image, preventing ancient chinese, greek and tibetan wellness knowledge using readily available plants and replace with manmade pharma products then outlawed any other method of treatment. Barter is not based on worth but on a time based human need.

  27. RON says:

    Are not the trillions of $ invested in negative yielding instruments a broader measure of “fear” in general than any measures derived from marginal changes in margin debt?

    • Wolf Richter says:


      I don’t think so. They’re a result of central banks’ “Financial Repression” — many banks, bond funds, private pension funds, government pension funds, and other institutional investors MUST BUY — they’re legally obligated to buy — certain government bonds and hold certain amounts of them. There is no choice. All central banks in jurisdictions where yields are negative have massively bought these bonds too. So there is no bond-market price discovery left. Those bonds are not an indication of fear, but of result of brutal financial repression.

  28. Michael Engel says:

    Schwab Street Smart is not coming together.

  29. Michael Engel says:

    1) SPX will spike. SPX will plunge.
    2) Those who held stocks since the 70s, 80s or 90s don’t know either.
    Many might sell, in order to avoid a new 2008/ 09 nightmare.
    3) By Dec 2019 Pareto chart will climb to a new high.
    4) The top 0.001%, 0.01%, 0.1% and the top 1% will multiply like
    rabbits. Liz Fang is ready for the hunt.
    5) The elite will seek protection supporting Trump.

  30. Shorts are not only speculators, short positions are used to hedge risk. Since most bear markets are cyclical and the bull market is secular, we always buy the dip. Put options are a low cost way to buy insurance on a short, sharp selloff. Low volatility makes option premium cheaper. Additionally in the “Quant” world, it is customary to buy the best stocks and to short the worst. The net result of lower interest rates is that bad companies get a (easy credit) lift. From a Quant funds perspective that doesn’t work so well. If you are hedged and your short position (insurance) gets squeezed you take profits on your long position, rinse and repeat. There are other ways to short this market, counter party risk, derivatives and swaps. The markets were hedging risk in 16′ leading up to the election, (election with no incumbent) and when the outcome was decided (it didn’t matter really) the hedges came off and the market moved higher. Considering the higher degree of political uncertainty the hedge against the outcome in the 20′ election should be going back on, but give it time. My own suspicion is that despite the pro incumbent reactions to the impeachment news, Wall St isn’t worried about what happens. Liquidity is rolling in from other than Fed sources, they can manage nicely either way. Candidates who promise to clean up Wall St never do.

  31. Kent says:

    Maybe this is a sign that the market is finally getting to a good place. Shouldn’t we want speculators to be scared? If you have an equal chance of winning or losing, maybe you’ll decide to go out and do something productive for a living.

  32. Jerome says:

    Got gold?

    • WES says:

      It just seems to me that those of us who learned to invest based upon free market principles have been at a big disadvantage since governments have increased their interventions in the market.

      We have had more trouble trying to figure out what the future impacts (i.e. winners/losers) in the market will be from current government interventions.

      Those investors whose have little or no past investment experience seem to have done very well because they aren’t burdened by past experience which appears to be irrelevant in today’s government controlled market.

      • The counter argument to this is to attack passive investors. The president has tariffs, Bernanke uses the premature rate hikes of 37 to guide policy. The willful forcing of old economics onto new financial technology invites a grand misunderstanding. I wouldn’t say that those buying a market which rides on monetary inflation are doing themselves any favors. Until you sell those profits are only entries in a ledger, a ledger you can take to the bank and borrow against. If debt is somehow miraculously something we thought it never was, (an obligation to repay with interest) then everyone should do alright. To that end new debt and old debt are the dividing line, which is why Fed is throwing T bills at banks, and not 30yr bonds. The penultimate game is when they print new money and obviate the old. Which is why some of the smart analysts warn against cash.

  33. WES says:

    It just seems to me that those of us who learned to invest based upon free market principles have been at a big disadvantage since governments have increased their interventions in the market.

    We have had more trouble trying to figure out what the future impacts (i.e. winners/losers) in the market will be from current government interventions.

    Those investors whose have little or no past investment experience seem to have done very well because they aren’t burdened by past experience which appears to be irrelevant in today’s government controlled market.

    • Wisoot says:

      Wes they were banking on you working on free market principles and still – currently – can jail you if you dont follow the law attached to the same. Irrelevance is how the small group of bankers view everyone else.

  34. Bobber says:

    There are a few more things not going well for speculators and high-wealth manipulators:

    -S&P profits dropping for 3rd straight quarter
    -Federal fiscal deficits exploding
    -IPO’s fizzling out
    -Manufacturing recession happening now
    -We’re close to the zero interest rate bound around the world
    -Trump re-election in severe jeopardy (based on current polling)
    -Record asset valuations

  35. Diablow says:

    A Dow Jones article is reporting that there have been massive insider trades going on before Trump tweets out one of his market moving tweets. When the casino is so obviously being rigged and manipulated, the smart position is to not play at all.

    • Unamused says:

      Don’t think of it as a presidency. Think of it as a profit center. They do.

    • Wisoot says:

      Exactly Diablow. A small group of bankers cant believe their luck that it has taken nearly 100 years for the realisation you have cited. Now that you stopped playing their game you have the headspace to start to create a new monetary system of barter based on human values of respect.

      • alex in San Jose AKA Digital Detroit says:

        This is why Socialism is no longer a bad word these days.

  36. raxadian says:

    [Why is one group of risk-takers fearing a rally, while the other group of risk-takers is fearing a sell-off?]

    Unicorns, Trade War and investors who waste money on stuff like Tesla, Netflix and Uber.

    Thankfully no one smart is investing in buttcoin, right?

  37. Michael Engel says:

    1) Ca peaches season between July and Sept.
    2) Overripe peaches will become rotten.
    3) 10 bananas in US New Hyde Park while listening to free speeches.
    4) Putin & Xi will handcuff the speakers of Hyde Park.
    5) Their seeds will rot.

  38. Keeper Hill says:

    Another example is this Brexit deal. It is frankly worse in major ways than May’s awful deal. Yet the pound rallied on it. People simply don’t want to do the legwork anymore.

    • Wisoot says:

      Exactly Keeper Hill, once 5G networks are impacting 90% of urban connurbation the plan will be complete. You will have discernment ability removed through brain wave modulation.

  39. Mean Chicken says:

    They’ve been known to ride the rails.

    (see: Rail transportation depression) – KSU

    (see: Trucking transportation depression) – PCAR

  40. LouisDeLaSmart says:

    Guys, do you understand that Wolf just quoted Shakespere’s Hamlet?

    “Something is Rotten in the State of Denmark”

    Shakespeare has portrayed Denmark as a place of human villainy — a breeding ground of political as well as spiritual corruption*…any parallels we can draw here? [*sentence taken from from]

    Truly timeless…

  41. Saltcreep says:

    For the first time since I can’t even remember when, I’ve finally tried on some cautious shorts a couple of times in the past couple of weeks against both the Nasdaq and against the DAX, but I’ve had to scamper out again pretty quickly.

    I’m sort of afraid of both central bank liquidity injections and the potential whiplash from unfolding news stories re Brexit, trade talks and whatnot. But the declining corporate profits, declining PMIs and business confidence, declining rates of GDP growth etc., and an ever more exposed consumer balance sheet, seem to be shouting out to broadly sell the crap… Ehrmm, sorry, ‘the stocks’. How can e.g. the DAX be levitating in this environment, and also the EUR at the same time? This confounds me greatly.

    I guess that the firm belief in the continued wealth transfer via central bank and fiscal authority robbery yet holds firm. But I’m still tempted to try yet another short next week, after the Brexit thingie has been voted on and kneejerked upon.

    • Larry says:

      “How can e.g. the DAX be levitating in this environment, and also the EUR at the same time? This confounds me greatly.”

      You sound new to active trading so I’ll give you some sound advice. Get rid of your margin account and go into a cash only options account. Shorting is best used as a hedge for long positions unless you do it full time. Buy an in the money put on the QQQ if you want downside protection, with limited risk.

      The Euro and Dax are levitating because there is a potential resolution to Brexit (which might break up the Euro-zone if it’s a hard Brexit), and it’s also assumed all the bad news is priced into the European markets, while US economic news is getting worse. If Brexit is resolved then expect the Euro to soar against the dollar. When the news finally hits, your positon should have been set up weeks or months ago. You should be actively reading everything on the subject, not just watching screens.

      The worst thing for the US markets will be a final soft Brexit resolution because European money will flow out of US markets, and Bund yields will soar, sending US treasury yields up in sympathy.

      • Saltcreep says:

        Hey Larry,

        Thanks for your generous and informative reply. I don’t even slightly doubt that I’m not doing things right.

        I must, by the way, add, that I’m not a trader. In respect of stocks I’m really only ever long, and even then largely in stocks in my own line of business and in my own region, where I delude myself that I might have some finger on the pulse. But by now I’ve sold most of my stocks, so I’m mainly twiddling thumbs in a financial sense. And I’m bored with it and simply want to do something, even if it’s only for the entertainment value of doing so. I guess it’s sort of like betting on a football game or something.

        And I simply can’t make myself believe e.g. that all bad news is priced into the DAX. It’s rebouding up towards its highs even as the stories we were told to support its climb have been decisively torn away from under it.

        So now I’m betting on markets taking a vicious turn south some time over the coming weeks, and my intention is to just keep placing small bets on such an outcome every week or two for a while, and just get out again as soon as they start to go against me. If they instead go on a new significant surge I’ll most likely take a break from it for a while. I must also note that, technically speaking, I guess I misappropriated the term, as I’m not even really short, as I just go long instruments that bet against stock market indices.

        Re Brexit, my stance has been, ever since the vote, that it won’t happen, although I’ve recently been swaying more towards believing it might go through after all. (In the larger picture I consider the process itself to simply be another symptom of our relentlessly deteriorating societies, though.) I furthermore guess that no Brexit is what markets would really like, and when the reality of an actual Brexit, even if a soft one, settles in, they might become less enthused.

        And I also consider a breakup of the Eurozone an inevitability eventually, but I reckon that is still a bit further into the future, and I guess it will merge with other unfolding events that I don’t currently want to ponder too closely, because that would likely make me go off and build a bunker or something…

  42. Dave says:

    With negative interest rates, nobody will ever have to work. You borrow $10 million at -5% interest and pay back $9, 500,000, yielding a half million. I think most people could get by on that.

  43. Randy says:

    The market is a bunch algos trading back and forth. Algos have no fear.

    • LouisDeLaSmart says:

      Wow, never thought of it like that that the trade is devoid of the human element, excccept for a few input parameters. I wonder if you had a market target value and a large enough money bag, could you push the market with algos where you want it to be…

  44. Quantitative Reality says:

    The top 0.001% are getting concerned, which does not bode well for the markets over the course of 2020 and/or 2021.

    Per a recent uber-wealthy UBS survey:

    “More than half of the super-rich around the world are already preparing for a recession… That is according to a UBS survey of 360 global family offices with an average family wealth of $1.2 billion. Results showed 55% of family offices see a recession by 2020, and to mitigate risks, 45% are already adjusting their portfolios, including shifting to bonds and real estate, while 42% are increasing their cash reserves.”


    Note that the top 0.001% make 71% of their income from long term capital gains and dividends, 13% from businesses, and 10% from wages. Note the bottom 95% make 80% of their income from wages, with 4% from businesses, and only 3% from long term capital gains and dividends. (Per )

    With margin levels falling as shown by Mr. Wolf, and the uber-rich getting nervous and thus pulling funds from their 71% income source, I’m not sure how this market is going to pull in the dumb money before we see the next crash/recession by 2020/2021. At some point buybacks will peak and then reverse, so who buys then (Fed)? It would be much easier to short the SP500 in the 3300 to 3550 range, yet I’m not so sure the historically typical last phase euphoria is going to occur as this time really may be different. It will be make or break time for the markets in the few months before the election, when the outcome (Pr0-Wall Steet or Anti-Wall Street) is much more predictable. Going long or short at this point has too many variables, with very little to gain compared to the last 10 years. Either lose 30-60% on a crash, or gain 10-20% on the last phase euphoria. Toss a coin, as the only thing I am betting is we do not continue range bound for much longer, as if you don’t have insider info on what the next tweet is going to be, you really are not making much income via dividends versus a super safe one year CD at 2.1% or even a mutual money market fund at 1.9%. Something will move the markets over the next three months, as either Santa comes by end of October or first of November (via trade and/or tweet), or we risk another reality check in the short term.

    It really is more tricky than gambling at this point, unless you know what and when the next tweet will be. And it is gambling as the rules shift mid game, with the odds moving by the nano second, and with a few single individual humans capable of adding free chips or tossing the table via meeting and/or tweet.

    Good luck with all your investments,

    Quantitative Reality

  45. DW says:

    Excellent article Wolf! This will turn out to be the biggest ‘duhhh, it was so obvious in hindsight’ moments in the history of trading.

    The stock market is going to decline for the simple reason people must justify buying stocks based on future earnings.
    We’re in an earnings recsession based on a raging down-turn in golbal growth, and now slowing growth in the USA. The bond market is shouting recession in the USA at the top of its lungs and China is in a downturn that may last years. Earnings estimates for next year WILL come down. No fiscal tax cuts this year fot the USA either.

    Now the bulls may think that the FED will save them, but that magic has already been used. The Fed will not embark on QE any-time soon and they’re not going to get the mega rate cuts the bulls believe they deserve.

    Go through the DOW, stock by stock and tell me who is going to lead? CSCO? MMM? INTC? or perhaps MCD? JNJ (asbestos and opiod queen?Boeing (killer planes?) . The Dow is a wreck. Can Walmart hold up the dow when the consumer continues to weaken?

    The only people making nuanced arguments about the value of over-priced stocks are the people who own them.
    The markets are primal beasts that sense fear, and weakness. Limping, bloodied creatures like the US markets will fall. Maybe slowly, but the top is in.

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