With experience hopefully comes wisdom.
Morgan Stanley Investment Management managing director and senior portfolio manager Andrew Slimmon has spent nearly 30 years at the the firm. And with that experience under his belt, he tells Yahoo Finance Live the recent speculative activity in the stock market is an indication of one thing bullish investors best consider before it’s too late.
A short-term market top.
“I think this is a sign that we are getting to a top and we are going to get a pullback. That’s just one of the signs,” Slimmon says of borderline insane gains of late in fundamentally weak companies. Judging by Slimmon’s comments, it would appear the market is currently in the third stage (out of a five step process, as TD Ameritrade explains here) of what typically defines a bubble: euphoria.
To be sure, the speculative buying has hit fever pitch levels this week as chat room traders armed with cheaply borrowed funds from the Federal Reserve (and a year of gains in Tesla) gang up to shred Wall Street short sellers.
GameStop shares continued to lead the buying frenzy on Tuesday, with shares up about 14%. The heavily shorted video game stock is now up 350% year-to-date even against the backdrop of a decade of sales and profit margin erosion due to how gaming content is consumed.
BlackBerry’s fundamentals these past few years haven’t been much better than GameStop’s, yet the stock rose again slightly in today’s session. Year-to-date the former phone maker’s stock is up 170%.
Nikola — who has a string of bad news in recent months from the departure of its founder to a loss of a key deal with General Motors - is seeing its stock get swept into the mania too. Shares of the company (which has yet to deliver any of its electric semi trucks) popped 15% out of the blue Tuesday, pushing the year to date advance to 57%.
Adds Slimmon, “This speculative flurry here feels like a top. I think we are getting to a point where we are going to get a pullback here.”
While many on Wall Street share Slimmon’s reservations on the bizarre trading activity and high valuations, not all are ready to call this an equities bubble.
Goldman Sachs acknowledges valuations are “extremely elevated” at the moment. But, those levels make sense, said Goldman chief U.S. equities strategist David Kostin.
“Taking into account the yield on Treasuries, corporate credit, or cash, the aggregate stock market index trades at below-average historical valuation,” wrote Kostin in a note on Monday.
Kostin did strongly hint there are 39 stocks that look like a bubble just waiting to burst. Some of the names include: Snowflake, c3.ai, Plug Power, Crowdstrike, Cloudflare, Zoom, DataDog, Shopify, DocuSign and Palantir.
What’s unclear in chatting up people on the Street is the pin that pops the bubble. But that pin lurks, make no mistake about it.
“I think the point of this is that there is going to be some real pain,” Slimmon says.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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