This morning, we published the latest commentary by Chris Metli, the executive director of Morgan Stanley’s institutional Quantitative and Derivative Strategies group, who made the case that while pitching hedges when the market is in the middle of a blow off top is a tough sell, that’s exactly what traders should be doing, listing three key reasons: 1) positioning, 2) pricing, and 3) potential catalysts, which “all suggest now is an attractive time to buy Feb puts as a hedge – and it is a rare event when all align.”
The main one, however, was that the current market move, one which earlier today saw the Dow Jones surge from 25,000 to 26,000 in just one week, is becoming increasingly irrational. A move, which according to the head of equity strategy at Morgan Stanley, Michael Wilson, is nothing short of late-cycle euphoria.
Wilson’s argument boils down to the following: where there are fundamental underpinnings to the equity move, mostly as a result of Tax Reform, which has yet to be fully priced in according to the bank, equities have run well in front of fundamental values, even if the trendline for both is higher… for now.
He then concludes that “the bottom line is that we have entered the late cycle euphoria stage we predicted a year ago. Because the tax cuts occurred earlier and are larger than we expected, it is more likely the S&P 500 will reach our bull case of 3,000 before it’s over.” That said, Wilson just wants “to make sure investors appreciate this is higher, not lower risk than the rally we experienced last year—the opposite of what we are hearing from many clients and other commentators.”
Belos some excerpts from his note:
Based on what our own equity analysts have done we think that tax reform has only recently started flowing through to consensus numbers. Exhibit 4 confirms this suspicion, showing the vertical jump in NTM EPS expectations that took place after December 15. Exhibit 5 shows the sectors and industry groups driving this jump in forward EPS, with Energy, Fins, Tech, and Industrials topping the list.
