Before we get into this week's stock tip, I wanted to explain some of the macro background behind our current stock picking strategy.
We speak to a lot of investors and traders every week to try to gauge market sentiment. Right now there is an air of hysteria out there, partly fuelled by breathless media coverage and partly because many professional investors are anticipating a market correction.
The big concerns seem to zero in on the level of debt the US government is carrying, and the toppy pricing we are seeing in stocks related to the AI boom, despite the ongoing amazing series of results. There is also an enormous amount of leverage in US stocks at the moment.
One private wealth manager we caught up with recently pointed out that there is now a record - $1.1 trillion - of US margin debt. This is money lent to investors who have used it to buy stocks. In September alone a further $67bn of borrowed money hit the US stock market.
"When margin debt hits record highs like this, it means a lot of people are investing with borrowed money," our source said. "It works great in a bull market, but it makes the system fragile when prices are falling."
Margin debt now equals about 2% of the value of the S&P 500 index, which is higher than during the dot com bubble in 2000. While this does not mean a market crash is coming - yet - it does mean investors are taking on more risk. It means small dips can quickly snowball into bigger corrections as traders have to sell to cover their margin. That creates even more pressure on prices.
Here at The Armchair Trader we still want to provide our premium subscribers with solid stock picks, but feel the emphasis has to shift to quality plays which are more insulated against potential market shocks. While there will come a time to short stocks, and short heavily, it has not arrived yet. This week's tip is, we believe, a high quality stock which will weather a major market correction and could be a very long term investment play.
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