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Yellen Comments on Stretched Valuations

David Becker
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The Fed Chair finished a two-day testimony in which she is required to speak and answer questions in front of both houses of congress. Generally, her comments are focused on monetary policy but during this testimony she actually commented on stocks.

Mostly interestingly comments from the Fed Chair where the shots fired across the bow of exuberance in certain asset valuations. In particular, in her Monetary Policy Report, she made reference to “substantially stretched” valuations in some parts of the tech sector, biotechs, municipal bonds and leveraged loans.

Despite the recent selloff in biotech’s and small caps over the course of the past few months, her comments were taken to heart and could potential erode the valuations in this sector. Small caps, which were the leaders during the first half, have now, come off substantially and the question remains of whether the broader markets can continue to rally without the help of smaller stocks.

The technical picture for the Russell 2000 which is broadly made up of smaller stocks is negative. A double top is now in place and the Russell is holding just above the 50-day moving average. The next target for the Russell is the 200-day moving average near 1140. Momentum on the Russell 2000 is negative with the MACD (moving average convergence divergence) index printing in negative territory with a downward sloping trajectory. This points to continued negative price action. The RSI (relative strength index) moved lower with price action which reflects accelerating negative momentum while it is printing near 41, which is on the lower end of the neutral range.

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