July 24 (Bloomberg) -- The 36,000 percent rally in a stock with no revenue is a sign there’s too much optimism in the equities market, according to Cantor Fitzgerald LP’s chief market strategist.
The risk of owning stocks currently outweighs the potential reward, Cantor Fitzgerald’s Peter Cecchini wrote in a report today. He suggested reducing equity holdings and raising cash, citing the recent rally in Cynk Technology Corp. as a symptom of a frothy market.
“It makes sense to become a little bit more cautious because we’re starting to see cracks in the foundation,” Cecchini said in a telephone interview.
Cecchini is not alone in seeing extended valuations in the equity market. Forty-seven percent of financial professionals say the equity market is close to unsustainable levels while 14 percent already see a bubble, according to a quarterly poll taken last week of 562 investors, analysts and traders who are Bloomberg subscribers.
The S&P 500 is valued at 18.2 times reported earnings, close to the highest level since 2010. Analysts have lowered their forecasts for earnings since April and now predict profit growth of 6.2 percent in the second quarter, according to the average estimate from a Bloomberg survey.
“We are just about ready to call it a year,” Cecchini, who also serves as global head of macro equity derivatives at New York-based Cantor Fitzgerald, wrote in the note. “It’s especially important to take a step back after we’ve hit the midpoint of our S&P target for the year.”
Cantor Fitzgerald’s midpoint price target for the benchmark gauge is 1,985, a level exceeded for the first time on July 3. The S&P 500 rose 0.2 percent to a record 1,989.94 at 12:24 p.m. in New York today. The index has climbed for three straight days as companies from Facebook Inc. to Caterpillar Inc. reported better-than-expected earnings.
The Cantor Fitzgerald strategist also expressed concern over what they see as overextended valuations in small-cap stocks, a sentiment echoed by the Federal Reserve in a Monetary Policy Report delivered to Congress on July 15. The Russell 2000 Index then slipped to a six-week low two days later amid speculation that earnings aren’t justifying share prices.
The Russell 2000 is up 238 percent since March 2009. Excluding unprofitable companies, it trades at 20.6 times earnings, close to the highest level since 2007, data compiled by Bloomberg show.
Cecchini said situations such as the rally in Cynk shares are “much more prone to arise during frothy markets.”
Cynk is the supposed social-network whose shares were suspended by the Securities and Exchange Commission on July 11 because of concerns about information accuracy and possible manipulation. The stock surged as much as 36,000 percent in over-the-counter trading from 6 cents, the closing price on May 15. The company, at one point valued at over $6 billion, appears to have one employee and no revenue, no assets, and no members on its social network.
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