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McAlvany Financial Group: Markets Could Drop 40% in a Cascade Effect

“Among McAlvany’s worries is low stock market volume. Trading activity has dropped 50 percent to 60 percent from about five years ago, he says.

In addition, “we have more people speculating in the stock market with someone else’s money,” McAlvany said. Margin debt hit a record of $401 billion for members of NYSE Euronext in September.

Those borrowings “increase what appears to be an absolutely sure bet in terms of upside in the stock market,” McAlvany said.

But, “another way of looking at that is we’ve got $400 billion of hot money that can come out of the market very quickly, and that’s enough to precipitate a major decline,” he said.

“We’ve anticipated 15 to 20 percent as a minimal move lower in the stock market, with as much as 40 percent being there if we begin to take out stop losses and really see a cascade effect in that market.”

Another bearish factor is the aggressive insider selling that has occurred amid the stock rally, McAlvany says. There’s a conflict between corporate executives selling their personal holdings as quickly as possible and their companies buying back shares, he says….”

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