Social Media/Biotech Stocks React as Yellen Says Valuations 'Appear Substantially Stretched'

(Updated - July 15, 2014 10:25 AM EDT)

Traders are reacting to headlines from Fed Chairman Janet Yellen that valuation metrics in some sectors "appear substantially stretched". It was noted, ..." particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year."

Notably, the comments weren't in Yellen's prepared testimony to Congress, but can be found in the full monetary policy report.

Here is what Yellen says in her prepared remarks to Congress:

The Committee recognizes that low interest rates may provide incentives for some investors to "reach for yield," and those actions could increase vulnerabilities in the financial system to adverse events. While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk. Accordingly, we are closely monitoring developments in the leveraged loan market and are working to enhance the effectiveness of our supervisory guidance. More broadly, the financial sector has continued to become more resilient, as banks have continued to boost their capital and liquidity positions, and growth in wholesale short-term funding in financial markets has been modest.

Here is what was said in the full report (bold ours):

"Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities. Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of “reach for yield” behavior by some investors."

iShares Nasdaq Biotechnology Index Fund (NASDAQ: IBB) is down 1%, Global X Social Media Index ETF (NYSE: SOCL) is down 0.8%. Facebook (NASDAQ: FB) is down 1.5%. Biogen Idec (NASDAQ: BIIB) is down 0.8%, Twitter (NYSE: TWTR) is down 0.6%.

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