Margin debt – borrowing to buy stocks – has shot ahead of the S&P. It normally follows the index up and down. When margined stock gets ahead of the market, any significant drop is in danger of snowballing as stock is sold to cover the margin. Call it the old fashioned type of Flash Crash, of the sort we saw in 1929 when stock was bought with subprime margin (90% margin on 10% cash), or right after the Lehman debacle when TARP was pronounced (see chart, courtesy PragCap). How the ‘bots might handle that we may find out – technicians are all over themselves with expectations of a 5-7% drop as early as tomorrow.
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