Wednesday, March 17, 2010

Morgan Stanley: Prepare for a Sell Off

Morgan Stanley says investors should prepare for a sell-off in the coming weeks as the market has gotten ahead of itself. Their equity analysts say the risks have risen in the near-term as sentiment swings wildly positive (see here) and risk assets run ahead of themselves, reports the Pragmatic Capitalist.

According to Morgan Stanley the put/call ratio represents overly bullish sentiment levels that are historically followed by sell-offs. In addition, the sign of excessive risk can be best seen in the run-up in the small cap vs. large cap ratio. Risk assets, represented by the Russell here, have surged to their highest ratio in terms of large caps in the last 12 months:

Morgan Stanley is correct, but it is more than the "market getting ahead of itself", it is a  market running out of fuel. And interest rates are ticking higher!

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