NEW YORK (Real Money) -- There can be various indicators that alert you to when markets are overbought or oversold. These aren't market-timing indications but simply ones that should cause you to reflect on what is going on in the markets.
Last week's Ira Sohn investment conference, an annual gathering of the some of the best, seemed to give off that smell suggesting markets may be getting a tad too optimistic.
Ironically, it wasn't because the speakers at the conference were giving warning signals, but the exact opposite. The stock picks being touted, in my view, were a clear signal that the markets are no longer fertile ground for value-seeking investors.
Activist investor Bill Ackman painted a bullish tale for Valeant Pharmaceuticals (VRX), a business that is trading at 83 times trailing earnings. To be fair, a P/E ratio is not an end-all indication of value or lack thereof, but still, investors are paying a pretty penny to own this acquisitive pharmaceutical conglomerate. Shares in Valeant are trading near an all-time high of $227 and have been one of the better market performers over the past five year period.
Mala Gaonkar of Lone Pine Capital recommended Microsoft (MSFT) as a long pick. This stock makes for a quick case study as to why good companies can be mediocre investments. A couple of years ago, Microsoft was trading in the low $30s. Most in the investment community were sour on the company and in favor of sexy names like Facebook (FB) and Twitter (TWTR). The shares are up nearly 50% since then and up over 20% in the past year, and the bullish picks are growing. At 20 times earnings, Microsoft is not a nosebleed stock -- but where were most of these hedge funds when the stock was trading for 10 times earnings?
Other picks at the conference included Yum! Brands (YUM), Walgreens Boots Alliance (WBA) and AbbVie (ABBV), names all trading at or near all-time highs. To be sure, an all-time high price is not an indication that the price cannot appreciate any further, but clearly investors need to exercise caution when paying 58 times earnings for AbbVie or 40 times earnings for Yum!, respectively.
David Einhorn, to no one's surprise, was again vibrant in his short of Pioneer Natural Resources (PXD), calling the fracking boom in the U.S. one of the worst return on equity exercises in recent corporate time. I believe the word "mother-frackers" was used in his analysis.
The market is in a very happy place right now: Savings rates and bond rates are basically zero and equity prices are going up. Thus, more money finds its way into equities. At some point, that pattern will shift. Caution is warranted.
Editor's Note: This article was originally published at 12 p.m. EDT on Real Money Pro on May 11.