[Photo: costa-news.com]

Here’s yet another reason to be cautious about the Wall Street rally - or not. Margin debt, a measure of speculation, just broke a 2-year high according to the NYSE.

However, margin levels can be viewed in two, contradictory ways: (i) as a bullish sign that investors believe the market will continue to rise; and, (ii) as a bearish sign that investors are overexuberant about the market’s prospects – much like in 2000, just before the dot-com bubble burst. In the latter case, if a market selloff (or panic) ensues, margin investors will be first in line to unload their ‘extended’ holdings.

That said, many analysts, including BNY Mellon Wealth Management 's Jeff Mortimer, thinks that concerns of a major correction are overblown.

“This isn’t a signal to me that markets are reaching an exuberant level like they did in the 1920s or 1990s, when speculation was rampant,” he said. “What our clients are doing is borrowing against the portfolios because interest rates are so low. They’re not leveraging up because they see the market exploding to the upside; they’re using leverage because they can pay it off at any time.”

Stay tuned – ‘20-20 hindsight’ may indicate who’s correct.