MORNING BID – Big Mo, Oh No

Apr 11, 2014 12:51 UTC

The question of whether the market is going into a longer, broader correction is one with a lot of wrinkles.

Whether these high-flying stocks are going to come back is the easier question to answer. Why? Because unlike stocks where most of the embedded value is in existing earnings and existing growth – things a person can cling to, like the utilities or telecom – these stocks ride based on their expected growth for years down the line.

And when the unknown is combined with optimism you get price-to-sales ratios of something like 20. So when they cheapen – that is, sell off – those price-to-sales ratios (just another way of valuing a company) they drop to 15 times sales, which when compared with the S&P 500 is still ridiculous (the whole index tends to run around the 1.7 area of late). Which tells you of course that valuation was never the name of this game to begin with.

So with the valuation not there, and investors no longer getting the gratification from seeing stocks rise as soon as they buy them, there’s a couple strikes against them. A third one is supply. Motivated sellers, knowing they bought the stock at higher prices, are therefore champing at the bit to get out of positions if the market surges to a level they’re satisfied is enough to either lock in profits (if they’ve been in a while), get out at even (if they bought recently) or get out with losses because they know they’re screwed. Because, make no mistake about it, people who bought these high-flyers this year are underwater, sometimes seriously so, and unless sentiment does a complete about-face, these “investments” suddenly don’t look like so much fun to own. Broken momentum stocks are an ugly thing – just ask those who rode shares of Crocs into oblivion.

How are we so sure of this? Using volume-weighted-average price data (and a big tip to Mike O’Rourke of JonesTrading for cluing us in on this). Using Datastream, we found that some of your momentum favorites have been on average purchased at much, much higher prices this year than they stand now.
A group of 24 big-gaining names with most of their value wrapped in future expectations, as identified by Credit Suisse, have disappointed those who jumped in this year hoping for lots of gains.

We won’t go through all 24 here, but here are five favorites, listing the VWAP, or average price investors have paid this year, along with Thursday’s closing price, and the difference between the two:

  • 3D Systems $71.90 $48.78 -32.2%
  • Twitter $56.81 $41.34 -27.2%
  • SolarCity $71.17 $55.13 -22.5%
  • Workday $94.28 $75.62 -19.7%
  • Netflix $385.91 $334.73 -13.2%

Not much to like there at all. On average, investors in Twitter in 2014 are down 27 percent from where they bought the stock, and it’s not even as if a 27 percent gain will get them to break-even - at $41.34, that stock now needs to rise by 37 percent to get back to this break-even VWAP level.
That’s a tall order, especially when sentiment is moving against the shares and hedge funds are correcting themselves from being more overweight in momentum than they were any of the other style factors that strategists measure (which include things like beta, volatility, earnings yield, dividend yield, and a few other metrics).

If there was one area that wasn’t constrained by the hedge fund managers, it was momentum – thanks to a rosy 2013 that many figured would just roll on in 2014. It’s been anything but that. Now, some strategists are warning that earnings are the next point of measurement and sure, that’s true – but that’s more for companies within a small range of where most think they’re valued. These stocks are different – the forecasts for growth over coming years vary wildly, because with names like this, things are just inexact (and even more so with biotechnology names, which are frequently all-or-nothing stocks).

Momentum works two ways – and now it’s working in the wrong direction for the bulls.

MORNING BID – Momentum stocks: A primer

Apr 7, 2014 13:25 UTC

Lots of stocks have been getting killed in the last several weeks and the declines don’t seem really like they’re set to abate headed into a week where news is again at a premium (sure, earnings, but it’s just a few names, and they’re mostly decidedly not in this category of the momentum names that fueled the rally in 2013). So the likes of Facebook, Tesla Motors, Netflix, Alexion Pharmaceuticals, and a bunch of others have seen their fortunes turn in the market. But at this time we thought it would be a good way to get into this topic again by trying to lay out just what the hell a momentum stock is in the first place, because they exhibit a number of characteristics beyond just “a stock that’s going up very high.” So here goes:

Growing Industries: Internet retail, internet security, solar, cloud computing, companies that use the cloud for providing services (think Salesforce.com), biotechnology, and anything else where the prospects for growth are big and related to a growing sector of the economy. Utilities don’t really qualify here, naturally. The reasons are two-fold: for one, in order to jump onto a rising growth story, you’d want to be in a place where the expected future returns outpace the returns you’re getting now, something you won’t get from the telephone company, someone who sells toothpaste, or the guys hooking up the electricity.

Revenue, Revenue, Revenue: Credit Suisse’s quantitative research models shows that the big winners in 2013 were those whose price when compared to enterprise value showed most of the value in the stock wrapped up in their future growth prospects. Lots of these types are showing a big boom in the money they’re bringing in every year, even if that’s not translating yet into earnings – Tesla, for instance, saw its revenue rise by about 75 percent in 2011, which then doubled in 2012, and increased nearly four-fold in 2013. That’s growth, and that’s what feeds the expectations for more growth. The exception here is probably biotechnology, where much of the prospects are given over to expectations for a drug approval – though it’s notable that Alexion, for example, has posted revenue growth of 37 percent or better for five years running.

Rising Stock Price: This is sort of a no-brainer, but it’s a little more nuanced than just “OMFG LOOK AT THAT.” (Ok, maybe not much, but let’s unpack it anyway.) There’s a lot of talk about stocks that steadily rise and then go through a period of what people blandly call “consolidation,” but in a sense that kind of thing is important – it means that investors are seeing their stocks sit, churn for a while, and not really move, but those confident in the prospects and in the valuation of a company will buy as these dips occur, thus ensuring a “base” when the stock falls back. They’re not “value” investors, but they’re investors believing that a company’s value sits at a certain price where they’d be willing to buy, again and again. But these stocks exhibit no such pattern – they don’t really come up for a breather at all, and sort of just simply keep going and going and going. So investors who get into these names, including but not exclusively hedge funds, are doing it and finding what Mike O’Rourke of JonesTrading called “instant gratification from price appreciation.” When investors talk about stocks going “parabolic,” that’s what they’re referring to – look at Netflix last year, rising with barely a stop from around $90 to more than $450 a share.

Volume and Volatility: This is an underappreciated aspect of the stock-price move, and that when you see these stocks start to take off, often volume will bust out in a big way on the up days as more and more people jump in to take advantage. They also tend to move around a lot.

Short Interest: Not always necessary, but often an added part of this. Just as these stocks often attract hungry buyers, there are a lot of hungry sellers who jump in as well and believe – as is likely the case – that the valuations are absurd. But with momentum stocks, that doesn’t really matter, so you see lots of shorts get burned. Green Mountain Coffee Roasters, Tesla, Netflix and a few others are good examples of those that built a stubborn short base for quite a while. Eventually, they will be right, but they may not even be in the stocks anymore, having gotten run over by big big mo.

Faddish Industries: Those that buy these names can either be emotionally connected to a story – prostate cancer drug maker Dendreon had for years a fervent group of followers who lived and died on every regulatory announcement – or they come out of brands that naturally attract buyers because they have a consumer appeal as well. Netflix, Priceline, TripAdvisor, or Tesla all work in this description. Sometimes they’re even an outlier in an otherwise slow-growing industry because of “fad” appeal – Crocs was a big momentum stock for a long time too.

So what’s all this make out as? The question is when people start to find value in these names, but given that tradition valuations don’t work (Netflix is valued at 20 times sales; the S&P is 1.7 times), investors start to see the upward momentum in these names sag, and then quickly exit as fast as they got in – Morgan Stanley points out that a basket of stocks consistent with hedge-fund overweights lagged a basket of HF underweights by 7.7 percentage points from March through April 4. There’s a point where these stocks become “broken” – and it can take several attempts before it happens, as it did in the dot-com era, but once it happens, there’s little real way to stop it. The average price paid by investors in a lot of these names ends up being higher than where the stock is at a given point, and that acts as a ceiling on a rebound. A few stocks escape this, but many don’t.

MORNING BID – Puerto Rico in the spotlight

Mar 11, 2014 13:45 UTC

The market remains in a bit of a vacuum, with interesting activity focused on a few speculative investments that don’t necessarily suggest anything about the larger environment – though one could extrapolate from the interest in these myriad issues that the market is getting frothy, one way or another.

The island of Puerto Rico will sell about $3 billion in bonds to a varying group of investors on Tuesday, many of whom are likely not to be traditional municipal bond buyers. What’s interesting to see, as our muni team pointed out late Monday, is that the bonds appear set to sell at an 8-percent coupon, with yields somewhere in the mid-8s or high-8s. That’s nowhere near the 10-percent yield that some had expected. (Full Story)

What may be happening is a bit of fortuitous timing as the market had been in the midst of a half-way decent rally for a bit here and as investors clear the decks of some emerging-markets assets that have underperformed. The rest of the world has caught a bit of a cold here, it seems, so safer assets – and Puerto Rico qualifies on some bizarre level – will reap the rewards.

Some of it is also the buyers: Distressed debt funds and high-yield funds, along with hedge funds looking for fat yields and a bit less concerned about the implied risk that the junk-level sale suggests. The constant refrain one hears is that people would invest in somewhere other than the stock market but have nowhere to go. Well, there’s some nice beachfront property here.

ACKMAN’S LATEST
Tuesday also promises the latest chapter in the saga of Bill Ackman vs. Herbalife HLF.N. This has so far not worked out all that well for Ackman, given the share increase in the last 12 months (admittedly, the stock has been weaker so far this year, losing about 18 percent). The hedge fund manager is expected to make a presentation that will include new allegations relating specifically to its operations in China, suggesting the company is violating laws in that country.

The Ackman thesis, essentially, is that Herbalife is a pyramid scheme, where only the first few investors are guaranteed to make money, though he has motivated opponents on the other side, including Carl Icahn, and of course, the company itself. As of Friday, about 18 percent of the company’s shares were being borrowed for short bets – a high figure – though it had been more than 20 percent a few months ago, according to Markit data.

Options action doesn’t really suggest much of a move for the rest of the week (at the money straddles put it at about 5 percent), suggesting people have, in part, grown weary of this battle, even as Ackman is reluctant to give it up.

MORNING BID – Contagion abounds, and the Super Bowl

Jan 31, 2014 13:57 UTC

On Thursday, this column suggested that a bunch of stock markets selling off in tandem did not satisfy the definition of contagion. Central banks dumping U.S. assets, weak auctions of government debt in seemingly less related countries, and big sell offs in less affected currencies? That’s getting closer to the mark.

Foreign central banks cut their holdings of U.S. debt stored at the Federal Reserve by the most in seven months in the past week, in a bid to defend weak currencies. “It makes sense,” said Scott Carmack, fixed income portfolio manager at Leader Capital, which has $1 billion under management. “It will probably continue as emerging markets try to prop up their currencies.”

So, overall foreign holdings of securities like Treasuries, mortgage-backed securities and agency debt at the Fed fell by $20.77 billion to $3.325 trillion in the week ended Wednesday, the biggest drop since June. The overall draw-down has come to about $55 billion since the Fed first said it would cut back its monthly bond buying. Debt and equity funds, meantime, continue to shift away from the emerging markets, with EPFR reporting a pullback of about $10 billion from such funds; debt funds have shed $4.6 billion so far in 2014, about one-third of 2013′s total drawdown of $14.3 billion (and that’s for a full year).

While in some ways, the most attractive solution for some of these countries to try to stem capital flight is through higher interest rates (making their debt more attractive to investors who need a bigger return over inflation, which is too hot in places like Brazil and Turkey), higher rates aren’t going to entirely solve the problem. And so you get the spectacle of Hungary cutting its 1-year Treasury bill auction and yields rising by about two-thirds of a percentage point just to garner enough interest for what they did manage to sell.

Hungary’s less in danger than some other countries. It’s got a big current account surplus rather than a deficit, but that hasn’t stopped investors from pulling back there either, driving the forint to a two-year low against the dollar.

The ongoing weakness in currencies – which many analysts say has not yet run its course – is going to pinch economic growth in tandem with higher rates. This can sometimes launch a vicious cycle that has consumers in those countries saving money rather than spending it – again, because of inflation. Combine that with a slowing in capital flows, and a weak export environment thanks to the China slowdown, and it gets a lot uglier, as Reuters’ Sujata Rao pointed out in an overnight story.

She quotes Steve O’Hanlon, a fund manager at ACPI Investments, who summarizes it well by saying: “Markets are pricing a pretty dire situation in emerging markets (but) is EM cheaper given potential future output? I wouldn’t say so but it’s getting there. When currencies stop selling off, if (governments) produce real reforms, I will be investing in those markets. If you don’t see any reforms, the rate hikes will just destroy growth, discourage investors and make the situation far worse.”

On the U.S. side of things, the stock market might see a bit of relief, however briefly. The outperformance by bonds against stocks this month might spur some reallocation trades, helping the market on its last day of the month. So it’s got that going for it, which is nice. Of course, futures are getting hit hard this morning, so maybe this is false hope.

SUPER BOWL SHUFFLE
From a more grounded (well, ridiculous) perspective, it’s the Super Bowl this weekend in the U.S.

Strategists have long made sport of the vaunted “Super Bowl Indicator,” which, for a long time, stipulated that when teams in the National Football Conference (the 49ers, Giants, Cowboys, to name a few) were victorious, the stock market was in line for a good year, but when teams in the American Football Conference (Dolphins, Raiders) won the big game, the equity market was set for a bad year.

That was modified a few years ago to include old NFL teams that had migrated to the AFC – the Steelers and the Baltimore Colts (this column does not recognize teams that move in the middle of the night.) So that puts us in a unique position this year.

First off, the AFC team is the Broncos, so a win by them should put the market on track for weakness for the rest of 2014. This is, of course, undermined by the fact that when the Broncos do win (and they won in early 1998 and early 1999), the market does pretty darned well. Furthermore, their opponent, the Seattle Seahawks, spent most of their existence in the NFC before moving to the AFC a few years back. If the Steelers and Colts can be grandfathered into the good side of the ledger, it stands to reason that the Seahawks ought to be included on the bad side of the ledger, no?

MORNING BID – Turkey, the Fed, and we all float down here

Jan 29, 2014 14:46 UTC

The messy sell-off in emerging markets was stemmed overnight after Turkey surprised everyone by raising rates to 12 percent – but it didn’t last. Major averages in Britain and Germany opened at their highs of the day but have since faded, and even though the big rate increases in Turkey, South Africa and India are meant to stem capital flight, so far the market’s shooting first and asking questions later. S&P futures were up about 20 points after the Turkey rate hike – an odd move for such a localized event – and we’re seeing the reaction now, which, to quote Tom the cat about the ‘white mouse no longer being dangerous,’ “DON’T…YOU…BELIEVE…IT.” So we’re lower, and continue to head lower, and for those of you new to the markets, this is what’s called a selloff.

The big question: Will the Federal Reserve defer its tapering campaign in recognition of emerging-markets difficulty? One could say the Fed cannot be expected to act as the underwriter for global risk-taking, but you’d be laughed out of the room, given the performance of assets around the world in the last several years as the Fed went into full-QE mode.

On the other hand, there’s a difference between providing broad support to the markets (via helicopter or not) and an actual admission that you’re changing policy to respond to specific issues worldwide, and such a move strikes us as the latter, not the former. With that in mind, it would be remiss to think the Fed does not continue at its measured pace, dipping down to $65 billion in bond purchases per month this time, as Janet Yellen takes the reins and we find out what kind of situation the new Fed head has gotten herself into while Ben Bernanke eases into what one hopes is a steady and muted retirement (think Johnny Carson, not Alan Greenspan).

For one, eventually reducing the monthly stimulus to zero at least gives the Fed room to ratchet up that stimulus again if they really need to.
Furthermore, the emerging markets, in a sense, are already gone. No, it’s not a disaster yet – but the implosion of China’s shadow banking system, the resignation of every Turkish official in Ankara, and the, well, uh, never mind, Argentina is Argentina, and isn’t going to be solved by the Fed put. The Fed might give it lip service in its statement but any more than that really ratchets up the moral hazard.

Furthermore, when one takes a look at the relative strength of emerging markets stocks with the U.S. market, it’s clear EM has been struggling for a while anyway. A comparison of relative performance between the MSCI EM index (.MSCIEF, or EEM.P if you’re into the ETF thing) is at 0.7 or so, and U.S. markets have been the steady outperformer since the beginning of 2013, and that outperformance accelerated throughout the year but particularly in the second quarter when the Fed started talking about reducing stimulus in the first place.

That doesn’t mean they can or will reverse course – it makes no sense. But less liquidity washing ashore means a bad investment can no longer be covered by smoke and mirrors. The MSCIEF’s relative performance index is still looking terrible, having fallen below the 30 level that indicates an oversold condition. It’s not quite at the nadir of the June 2013 or May 2012 selloffs, but it’s close, so if there’s a place one might expect some buying, it’s now. But it’s not happening yet – and that does raise questions about whether we’ll see more soothing words from central banks.

WE ALL FLOAT DOWN HERE
Back in the USA, the Treasury is readying its first-ever auction of two-year floating-rate securities, likely to see demand from various types of investors.
There are currently more than $200 billion in agency and “supra-sovereign” floating rate notes outstanding, mostly from Federal Farm Credit and Federal Home Loan Bank, per Morgan Stanley data. So, Treasuries should add nicely to the mix here, and it’ll quickly become a very big dog in a very small pond (dogs can jump in ponds, go with the analogy). So the $15 billion will add to the week’s mix of other supply.

For one thing, this gives the Treasury the chance to manage its issuance a bit more by reducing the number of short-dated auctions of bills, instead issuing this note that resets based on market rates for floating-rate notes. It will helpfully cut back on the weird dislocations that the market has seen of late in bills that are maturing just as the United States is set to run afoul of the debt limit (again) or face some kind of annoying only-in-Washington-type spectacle.

(Of course, if it was all two-year floaters, then in the month it had more floaters coming just as a budget crisis hit, those yields would go through the roof. So you can’t entirely solve the Washington problem this way, and floating-rate notes as far as we know cannot hold Congressional office).

The other advantage for the Treasury is the lack of what’s called “term premium,” which Morgan Stanley says will lead to interest-rate payment savings.
Term premium refers to how much additional interest you have to offer someone who is taking the risk of buying longer-dated securities (and therefore risking wide swings in interest rates or other unforeseen events over a five-year period vs. say, six months). But floating rate notes have no such provision (they float, after all), so that *should* save Treasury some money.

Reuters’ bond correspondent Richard Leong points out they’re expected to sell with a yield of 0.10 percentage point, almost a quarter less in the two-year fixed-rate note supply sold on Tuesday. So, that’s savings for Uncle Sam until the FRN yield rises above the fixed-rate two-year notes. Overall, the interest rate should be greater than what’s embedded in notes, though, which is good for money market funds (they hold about $276 billion of floating rate notes already).

FRNs are great in an environment where interest rates are on the rise, which has been the case for several months now (until this month that is), and therein, of course, lies the danger. If rates fall, well, not so great, as the interest rate on the notes would be chipped away.

MORNING BID: The deepening EM selloff

Jan 24, 2014 16:01 UTC

The contagion is building. Major world markets are taking it on the chin, U.S. stocks have slumped, and major asset managers in Europe are seeing shares fall, with some citing corporate exposure to emerging markets in general and Spanish exposure to Latin America in particular.

Safe havens – from Treasuries to gold to the yen and Swiss franc – are way up. And really, while specific country issues are in play here, (Argentina is, well, Argentina), the removal of liquidity on one side of the world and a slowing economy on the other is enough to shake out some long-held notions of what’s going to be the environment.

Coming into the year, a prevalent view was that 2014 would work out as something similar to 2013; stock multiples would rise more, bond prices would fall, keeping yields higher, and investors would keep moving money into stocks, with the primary analysis being something along the lines of, “What else ya gonna do?” But January has, if anything, been a lesson in debunking just about all of the preconceived notions the market held onto at the end of last year.

U.S. stocks still haven’t done all that badly. Bond yields are lower, though, which wasn’t expected, and that comes at a time when fund managers are operating with some pretty dug-in ideas. As Bank of America-Merrill Lynch put it in a comment Thursday: “No one thinks stock markets will fall this year; our January survey revealed just 6% of investors believe bond yields will decline in 2014 and the level of distaste for Emerging Markets was tangible.”

Merrill itself falls into this category; they’re on the bullish side too, with their preferences being the US, Japan, real estate and high yield, relative to commodities, emerging markets and bonds. So those bets are being tested as well.

It’s not enough to say that what’s happening represents some kind of comeuppance from all of those who have gotten fat and happy on the market’s extended gains. After all, plenty of people dislike emerging markets, and they’re still dropping regardless of sentiment (and regardless of the usual contrarian “it’s gonna end!” type opinions starting to emerge, tentatively).

The pain trade is really rewarding investors by going into the bond market. The world economy does seem to be improving – though a weak Chinese manufacturing survey set off a cascade of selling across emerging markets that roped in some of the world’s weakest sisters already dealing with their own issues (Turkish lira, Russian ruble, South American bond markets, particularly Argentina and Venezuela.)

The selling has resulted in a bit of soul-searching. Manik Narian, emerging markets strategist at UBS in London, told Reuters’ Sujata Rao-Coverley that, “until now, there has been a lot of dedication shown by institutional investors in EM debt but possibly that’s being shaken now. There are signs it’s becoming a more broad-based move.”

The removal of liquidity figures to be an ongoing theme throughout the year, and that’s going to hit the more vulnerable markets – those nations with ugly balance-of-payments statements that reflect importing capital to pay for domestic spending.

It’s what felled Iceland a few years back, and looks to hurt Argentina once again, prompting the country to try to stop defending the peso, causing the worst one-day drop since 2002 on Thursday. (The economy minister said today that it wouldn’t allow it to continue to devalue, so file that under “Empty Threat of the Day.”)

The real question is how far the selling goes, how far developed market selloffs will go, and whether those looking for disaster are finally being vindicated.

MORNING BID – Short Stack

Jan 21, 2014 14:57 UTC

The week brings a slew of earnings, and then anticipation of the following week, which will bring the Federal Reserve’s last meeting chaired by Ben Bernanke, with media reports already starting to concentrate on the Fed and look past results a bit.

That’s a mistake, of course – the outlook for corporate America vs. a predetermined outcome from the central bank is a no-brainer – but the Fed’s continued exit underpins the shifting sentiment in the market right now.

That is, short sellers are starting to feel a bit more confident, even if the market isn’t at a point where wholesale short bets are being rewarded (if you bet correctly, say, on JC Penney, you’re aces).

As Reuters’ Rodrigo Campos and Sam Forgione wrote in a story over the weekend, Credit Suisse’s prime services group shows the funds with a long-short bias are still leaning long, though a bit less than in the last week (55 percent, which is still bullish). (Full Story)

Notably, though, the market’s 20-day moving average for the S&P 500′s average daily trading range has dropped below six-tenths of a percentage point, which is about as dull as one can get when it comes to the markets. That’s data from Mike O’Rourke of JonesTrading, who also points out that such dead time (the time when it’s also impossible to go short) either ends up in a breakdown or a breakout in shares.

Right now, one would have to bet on the former; the forward price-to-earnings ratio sits around 15 and change right now – about at the historic average or so, and at a time when an increase in multiples seems a bit far-fetched.

If there is going to be volatility, it’s going to come as a result of the surprises we see in the earnings data.

The pattern has oddly reversed this time out: More companies are beating on revenue rather than earnings, with just half of the companies that have reported exceeding earnings estimates.

Some of that is because revenue expectations have been damped dramatically; the expectation is for just a 0.5 percent rise in revenue, which is pretty much the coffee-and-donuts budget at most major companies.

For earnings, though, the forecast was for a 7 percent increase, which may be a bit too lofty. StarMine has Noble Corp, Crown Castle, Lockheed Martin and Textron pegged as those that may miss current forecasts, while they see Travelers and Teradyne as more likely to beat estimates.

Other bellwethers include Texas Instruments, good as a barometer for overall chip activity given their technology is used all over the place, Johnson & Johnson, Verizon, and Netflix. The latter has been a target of shorts in the past, until the last remaining short seller of the name, bankrupt and penniless, moved to an ashram or something.

MORNING BID – Let’s be careful out there

Jan 17, 2014 13:26 UTC

The first couple of weeks of the year have caused some investors to examine the hyper-bullishness that closed out 2013 – the most successful year for equity-market investing in more than 15 years. Still, a few weeks of softness this year didn’t stop the S&P 500 from hitting a new record Wednesday, however briefly.

Short of the perma-bears, who only see the market as a walking disaster, some notes of caution have rung from those who expect stocks to continue higher, yet struggle through what’s been a mixed start to earnings season.

If anything, the results so far indicate investors are going to have the bull thesis tested, from chipmaker Intel’s middling numbers, outlook for flat 2014 revenue and margins and no sign of that capex everyone had looked for, to the inevitable correction in Best Buy, one of the best performers of 2013 (second in the S&P, with only Netflix exceeding it).

Interactive Brokers strategist Andrew Wilkinson noted in commentary Thursday that the options market never saw the 29-percent drop coming, with some contracts putting a robust 2-percent chance of such an occurrence ahead of time.

On a broader basis, Goldman Sachs strategists noted early in the week that they’re concerned with investor sentiment, hearing many people are looking for further multiple expansion – along the lines of 17 or 18 times forward earnings. And that’s at a time when historical figures suggest price-to-earnings ratios are already relatively high and such expansion would push the S&P into ranges not seen since the tech bubble of 1997-2000.

That doesn’t mean it can’t go higher, but they point out that on a cyclically adjusted price-earnings ratio, the S&P is 30 percent overvalued in terms of operating earnings per share and 45 percent overvalued using as-reported earnings. (Which is all the more surprising, given Goldman sees sales beating the consensus in 2014 – just that it’s not going to translate into gains for equities.)

Even the bulls are a bit on the back foot. Tobias Levkovich, Citigroup’s equity strategist, sees a good year ahead, but without a correction in two years, he cautions that bull markets will still have times where they turn ugly, even for a while.

“Chasing the tape simply on the basis of momentum may not be a good strategy since expecting another 25 percent to 30 percent appreciation in 2014 seems rather excessive,” he wrote this week, “especially with euphoric investor sentiment readings.”

Yes, that means all of you.

  • # Editors & Key Contributors