Stocktake: Keep your risk management in check

The US bull market is alive and well, but increasing speculation suggests risks are rising.

So says Topdown Charts' Callum Thomas, who points to trading in bullish and bearish leveraged exchange-traded funds (ETFs). Currently, traders who like to use leverage are increasingly preferring bullish ETFs to their bearish counterparts.

Assets in leveraged-long ETFs have risen fivefold to more than $50 billion since March 2020. That’s “certainly not systemic or even particularly material”, says Thomas, given the US stock market is worth close to $50 trillion.

It does, however, show a “clear shift in behaviour”. Furthermore, leveraged ETFs are only one way to make a leveraged bet – traders can also use options, futures, margin debt and other instruments, most of which confirm speculation is on the rise.

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This is the kind of activity that tends to happen in the latter stages of market cycles, cautions Thomas.

Can it go higher? Yes. Is it too high? Maybe. Is it a sign of risks building up in the system? “I think so”.

Leverage can accelerate gains in strong bull markets but it can accelerate losses and “ruin lives” on the way down, says Thomas. His advice? “Keep your risk management in check”.