Thursday, August 20, 2015

Momo No Mo' - BofAML Warns Stocks "Close To A Tipping Point"........

Momo No Mo' - BofAML Warns Stocks "Close To A Tipping Point"

Momentum traders - relying on the 'trend is your friend' theme - may have a rude awakening soon as momentum stocks trade at a stunning 50% premium to the market (vs an average 20%). As BofAML notes, high growth, high multiple names that have been leading the market over the past year are showing some signs suggest we are close to a tipping point. The growth-to-value spread is at its highest since the peak of the dotcom bubble in 2000 and, as BofA ominously notes, when momentum ends, it ends badly - with an average loss of 25% over the next 12 months.


Another eerie sign that the end of momentum may be nigh: July's outperformance of high secular growth names pushed the Growth / Value outperformance gap to 6.5ppt in the YTD, the widest gap for this point in the year since 2000, the year of the Tech Bubble peak.

The problem with momentum trades is that you have no margin of safety. When you get on the bandwagon, you shut your eyes to valuation and reality.

There is currently a strong belief that the financial markets are not in a bubble. The arguments supporting those beliefs are all based on comparisons to past market bubbles. The inherent problem with much of the mainstream analysis is that it assumes everything remains status quo. However, the question becomes what can go wrong for the market? In a word, "much."

Economic growth remains very elusive, corporate profits appear to have peaked, and there is an overwhelming complacency with regards to risk. Those ingredients combined with an extraction of liquidity by the Federal Reserve leaves the markets more vulnerable to an exogenous event than currently believed by most.

It is likely that in a world where there is virtually "no fear" of a market correction, an overwhelming sense of "urgency" to be invested and a continual drone of "bullish chatter;" markets are poised for the unexpected, unanticipated and inevitable reversion.

Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today. If our job is to "bet" when the "odds" of winning are in our favor, then exactly how "strong" is the fundamental hand you are currently betting on?

This "time IS different" only from the standpoint that the variables are not exactly the same as they have been previously. Of course, they never are, and the result will be "...the same as it ever was."


Crowded trades and thin liquidity...POP GOES THE BUBBLE!

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