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Speculation alert: Margin debt at a peak Add to ...

If you belong to the camp that believes the stock market is getting ahead of itself , here's some evidence of investor exuberance: Hedge funds increased their net leverage in January to the highest level since October 2007, as they took advantage of record-low borrowing costs to bet that the U.S. equity rally will continue, according to a Bloomberg News article.

Debt at margin accounts at the New York Stock Exchange, minus cash and unused credit from margin accounts, climbed to $46-billion (U.S.), according to data released by NYSE. Total margin debt was $290-billion.

Money borrowed at the NYSE can help gauge speculators' bullishness toward stocks. Margin debt peaked in February 2000 and in July 2007, before stocks plunged, while unused credit in margin accounts rose to a record high of $386-billion in August 2008, about seven months before the Dow Jones Industrial Average rebounded from a 12-year low to start an 85 percent rally to date.

A potential pitfall for those trading "on margin" is a sharp decline in stock prices. A wave of margin calls can worsen selling pressure on stocks and was seen as partly to blame for the market's woes during the financial crisis.

Speaking of borrowing and speculating: If you're wondering what's hot on short-sellers' lists these days, Globe Investor reporter Simon Avery has run a number of screens examining the issue:

  • Stocks that shine – among short sellers
  • Where short sellers fear to tread
  • More bad news for U.S. papers
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