Thursday, March 06, 2014

Are Stocks Getting Bubbly?

Markets are higher again in early trading, with most major indexes pushing to new highs.  The consistent uptrend in the markets has some asking whether stocks are getting too bubbly?

There are a few sectors where things seem to be a little overheated.  Biotechs with little profits have been trading higher nonstop.  So this is one area of concern.  And social media stocks also trade at crazy valuations.  Not as bad as the dot.coms, but certainly frothy.  But outside of those areas most things look healthy to us.  Corrections can come at anytime, but we don't see rampant speculation in stocks, we don't think the average stock is overvalued, and judging by the interest rate cycle and the business cycle its hard to say we are in the later stages.

What makes forecasting this cycle more difficult is the fact that we have never seen the Fed hold rates at zero for this long.  So it is making the cycle both elongated and irregular.  No one is sure how it will play out.  One Fed official said he sees the first rate hike coming in 2015, and that would at least get us on a more "normal" path that investors have seen before.

This morning both the ECB and the Bank of England kept policy steady and held interest rates at 0.25% and 0.5%, respectively.  So the Fed isn't alone it its ZIRP policy.  But it will certainly make the next few years interesting.

Asian markets were higher overnight.  China's Finance Minister said that GDP growth should be in the neighborhood of 7.2%.  This is lower than the 7.5% figure that we have seen most Chinese officials cite.  Are they trying to talk down their growth rate??

Oil prices are easing back a little further to $100.85.  And gold prices are higher around $1349.

The volatility index continues to hover at low levels near 13.75.

Trading comment: The stairstep market continues, and we feel like we have been saying this for almost 2 years now.  More stocks are becoming extended, and we don't like to chase that type of price action.  But we remain comfortable adding to stocks that are breaking out of consolidation patterns after digesting some recent runups.


Post a Comment

<< Home