A good number of traders have suggested that quantitative easing (the Fed program of buying bonds) is essentially steroids for risk assets. It’s hard to argue otherwise. When the most powerful financial force in the world is buying to the tune of $1 trillion per year it’s hard not to follow suit and risk appetites have clearly soared since the Fed began the programs roughly five years ago.
Over the weekend, the folks at Decision Point (now part of the fantastic StockCharts.com site) reviewed the current sentiment situation over at the Rydex family of funds which offer a variety of bullish and bearish leveraged stock market funds. Traders there are clearly “extremely bullish”:
Longer-term, Doug Short just updated his chart depicting the net free credit in investor accounts. Unlike sentiment polls which tells us what investors are telling us about the market, this is terrific gauge of what investors are actually doing with their money:
We just set a new record for negative credit balances. What this means is investors have never before utilized this much net margin debt (cash minus debt in their accounts). The next largest deficit was at the height of the internet bubble and we now how that trade worked out for them.
The bottom line is investors have now become super-bullish – or, if you buy the idea that the Fed has inspired this epic risk-taking, we should probably call them “Frankenbulls.” Just like those crazy Belgians who have genetically engineered a new breed of “Frankencows” the Fed has engineered an entire class of “Frankenbulls” addicted to leveraged investments in stocks. And at some point it will come back to haunt them.