Janet Yellen's Favorite Momentum Trades

The Fed scolds social media July 16, 2014     Janet Yellen's Favorite Momentum Trades   The Fed scolds social media Irrational exuberance 2.0 Plus: The dumb money takes over   Greg Guenthner coming to you from Baltimore, MD... Greg Guenthner Fed chief and rouge trader Janet Yellen must have lost some cash on a wayward Facebook trade last week, because she's not too happy with the market's beloved momentum stocks... Here's the dirt, straight from the Chair's mouth: Valuation metrics in some sectors do appear substantially stretched--particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. She's so nice that she had to say it twice, notes Business Insider. Here she goes again: Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms. But wait--don't sell everything! Yellen said she isn't concerned with valuation issues in the broad market. So investors aren't "excessively optimistic regarding equities" just yet. Thanks, Janet. At just seven months into the job, Yellen already has her very own irrational exuberance moment for the scrapbook. And from the looks of the markets yesterday, traders were paying close attention--at least initially. If you weren't looking too closely, yesterday was another mundane summer trading day. The S&P finished down just about 4 points. But under the surface of the big index, there was plenty of telling action. Small-caps took a big hit. The Russell 2000 fell my more than 1%. The iShares Biotech ETF shed more than 2% on the day. Most social media stocks on my radar finished in the red (though some fought to make up their largest losses late in the afternoon). So just to clarify, the Fed wants you to keep buying stocks. Just don't buy those pesky speculative names in the frothiest sectors. Got it? Oh, and I'm certain that everyone was trading those social media stocks because they were good values, right? It had nothing to do with momentum--or the fact that high-profile IPOs from these sectors have been all over the news for the past couple or years... "It's even more rich in light of a speech she gave earlier this month in which she said the Fed no longer much cares about asset bubbles and it would be a bad idea to raise interest rates to fight them," comments our own Dave Gonigam over at the 5 Min. Forecast. "Asset bubbles, she averred, only become a problem if they threaten to take down the economy along with the assets." So what the heck are you supposed to do in light of these new comments? Let's check the history books. That's where you'll find the Fed's not-so-stellar track record when it comes to timing these potential bubbles. Remember, Greenspan delivered his "irrational exuberance" speech in late 1996. The speech happened after the Nasdaq had jumped 74% in two years and hadn't seen a 20% decline in more than six years, MarketWatch reminds us. Of course, we know what happened next. The Nasdaq dropped initially after Greenspan's comments, only to soar to new highs and climb more than 50% through mid-1998. The lesson? Keep a close eye on the trends--not market comments from the Fed. Your portfolio will thank you...         BOMBSHELL: An Obama "conspiracy theory" that's actually true Don't worry. This has nothing to do with JFK, Area 51, UFOs... And it's not about phony birth certificates or secret Muslim faith. This is about a real Obama "conspiracy theory"… crazy but still 100% true. Click here for the surprising proof.           Rude Numbers Targets, Predictions and Wild Guesses   23% gains are in the books for Time Warner in pre-market trading after Twenty-First Century Fox reportedly will offer more than $75 billion to buy the company... $1,298 is where you'll find gold futures this morning. The yellow metal is attempting to find its footing after a rough start to the week. It's up a little more than $1 in early trading... 1,976 is where you'll find S&P futures today. Stocks are looking to open in the green once again this morning... 15,475 marks today's close for the Nikkei. The Japanese Index is working to top its late January highs and turn green for the year... $4.12 is the price of natural gas this morning. Natty is trying to stabilize after enduring a month-long selloff...     Rude Trends When to Buy... When to Sell   Investors are tired of seeing their neighbors banking gains while they wait on the market's sidelines. This begs an important question... Is the smart money ready to pass the baton to the herd? "Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over," Bloomberg reports. "About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months." Of course, what they don't tell you is that the previous 12 months--and several years preceding them--saw massive outflows from stock funds. Investors weren't clawing to get a piece of the stock market in 2009. Or 2010. Or even in early 2013 when stocks began to push steadily higher. So while we could be witnessing some bad timing here with the major averages extended, I doubt renewed interest in the markets is ready to mark a major top. Not yet... [Ed. Note: Send your feedback here: rude@agorafinancial.com - and follow me on Twitter: @GregGuenthner]     Ignore At Your Own Peril Today's Must Read Links   A Little-Known IPO Hint: How to Get In Before Stocks Go Public! Exposed: Wall Street's mysterious "Executive Dividend Program" Secret "Oil Treasure Map" Could Make You a Millionaire     BE SURE TO ADD dr@dailyreckoning.com to your address book.       Additional Articles & Commentary: Join the conversation! Follow us on social media:         The Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Agora Financial delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from The Rude Awakening, click here. Please read our Privacy Statement. For any further comments or concerns please email us at rude@agorafinancial.com. 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