Opinions vary right now as to whether we’re seeing the return of bubble-like qualities across a broad swath of the market or just in select names (which really isn’t a bubble, then, bubeleh, just overvalued stocks).
With the Ukraine issue subsiding a bit, investors had a chance to sink their teeth back into the market, including a number of areas that seemed ripe for buying, like small-cap names, which saw a very strong 2.6 percent increase on Tuesday that outdid the larger-cap stocks.
Fund flows have remained strong to smaller stocks, and the overall valuation picture is still somewhat complicated here, as lower interest rates have tempered concerns about reduced liquidity (it’s a strange thing to see the safe-haven play into bonds not quite recede, while stocks shoot to the moon. The best of both worlds, until it ends.)
Naturally there are skeptics. Mike O’Rourke of JonesTrading has been a consistent one for some time, and he went all-out in a late note, pointing out that the double-levered long Russell ETF had 17 times its average daily volume.
That, he said, is “either some short being covered or a major reach for risk,” also noting the ongoing moves overnight seem correlated with dollar/yen and the bond market. Again, this is more a signal of a risk-on/risk-off environment than one operating on expectations of economic and earnings growth.
With the S&P 500 once again at an all-time high, it’s hard to argue that point, but let’s give it a shot anyway. The bull case would be that the weather will recede as a true problem and that growth and overall cash flow is good enough – and that low yields still make it complicated to invest in other asset classes.
It’s not a stellar argument, particularly when many of the more bullish strategists still also don’t see the S&P gaining much more than a few percentage points in the rest of 2014.
One outlying argument came from Morgan Stanley’s Adam Parker, who points out that even though about 40 percent of tech stocks have a price-to-sales ratio that exceeds 5 times, that’s still not close to the tech-bubble peak, when it was about 80 percent. Admittedly, this figure is at a five-year high at a time when people continue to fear markets rolling over somehow.
Still, the big gains in the S&P and Russell suggest a possible “blow off” move, according to Jason Goepfert of SentimenTrader. He says moves like this, in the past, have been at the apex of a rally – especially as the small-caps and biotechs moved up sharply, and they’re the kind of high-beta outperformers that go nuts just before the deluge. So there’s that.
Longer-term strength can follow moves like this, often after some short-term weakness, however.