Are we at bubbles for tech?

(This would be the analysis that you never seen in any bulge bracket broker. This is only known by real portfolio managers. I would suggest whoever read this not trying to use this to challenge bulge bracket strategist)

Since the beginning of 2024, the three major US stock indices have been continuously rising. However, the higher they climb, the more cautious observation is needed to determine whether a bubble is quietly forming. For investors, it is often difficult to judge whether a bubble is forming or not. Therefore, we will introduce two unique and powerful indicators that can be used to identify signs of a stock market bubble and avoid potential bubble crises.

Introduction of Two Indicators:

1.     S&P 500 Stock Price　Divided by Money Supply

2.     Finra Margin Debt Divided by Money Supply

By normalizing the data of the S&P 500 stock price and Finra margin debt with the US money supply in a similar way to the price-to-earnings ratio, we can obtain the corresponding stock market prices and leverage in terms of unit currency. These are the two indicators we use to observe whether the stock market is experiencing a bubble.

S&P 500 Stock Price Divided by Money Supply: This is used to observe whether the current stock market valuation is too high. When the stock price deviates significantly from its average level (indicating overheating), it often signals the gradual formation of a market bubble.

Finra Margin Debt Divided by Money Supply: This is used to observe the willingness to borrow for investment. If the margin debt is excessively high, it indicates that more retail investors are entering the market, which suggests that a bubble may be quietly forming. The possibility of overvaluation in the stock market also increases. When margin debt begins to decline significantly from its peak, it indicates the burst of the bubble. Now Finra Margin debt divided by Money supply is at around 0.3. Historical trough is 0.2 and historical peak is 0.4~0.5. Which means retail investors are not yet crowded.

Note: Finra margin debt refers to Margin Debt in FINRA accounts, which is the total amount that margin account holders borrow from brokerage firms to invest in stocks. FINRA stands for the Financial Industry Regulatory Authority, the regulatory body for the US financial industry.

The above two indicators each represent the valuation of stocks and the willingness to finance in the market. Observing only a single indicator has its limitations; not all instances of high stock valuations signify the occurrence of a bubble, nor do all instances of decreasing financing necessarily indicate a reversal in the bullish trend. Therefore, by combining these two indicators and observing them together, we can identify periods when funds can no longer support excessively high stock prices, thus more effectively avoiding potential bubble crises.