Low Cash Levels, High Margin Debt: Different This Time?

March 27th, 2013

by Chris Kimble

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Earlier this month I shared that cash levels/negative net worth in brokerage accounts were nearing the lowest levels in history (see post here). The last three times levels were this low the market fell in price.

My mentor Sir John Templeton said the four most dangerous words in investing are…"It's different this time!"

The chart below suggests that something "IS DIFFERENT THIS TIME!"

The inset in the above chart reflects that negative net worth and margin debt are reaching levels not seen many times in history. The last couple of times this combo took place the stock market retreated a little bit in 2000 and 2008.

Is anything different this time around? One thing that is different this time around is … if we take two extreme emotional market price points (the 1987 high and the 2002 low) and draw a support/resistance line into the future, it happens to come into play where the S&P 500 is RIGHT NOW!

Is the "Averaged PE ratio" any different this time?

The above chart from Bruce Carman looks at that averaged PE ratio since 1877. As you can see, if this were the only tool you could use, does the market look like a screaming bargain right now?

Some things aren't much different now than at the 2000 and 2008 peaks, especially when you look at cash levels in brokerage accounts, margin debt and averaged P/E ratios. There is one thing that is different this time: A resistance line that started at the 1987 highs and the 2002 lows is now coming into play, 11 years later.

Will the results be any different this time? Do we "have to go down there? If two other things fall into place, I am going to do something different, something I haven't done in 30 years.

If you would like to see how I am going to play this situation, send an email to services@kimblechartingsolutions.com and in the subject box enter "game plan".

For information about Kimble Charting Solutions, send an email to services@kimblechartingsolutions.com.

Website by the Boston Web Company