The Markets

Is it a melt-up?

You’re familiar with the word melt. Ice cream melts. Snow melts. You may have seen someone melt down (or have done it yourself). Right now, markets may be experiencing a melt-up, according to Barron’s. Melt-up is a counterintuitive term which describes a sharp, emotion-driven improvement in market performance. Last June, The Wall Street Journal blog described the melt-up phenomenon like this:

“Money managers and analysts are beginning to talk about an idea that dates from the roaring ’90s: a rapid stock gain known as a melt-up. In the late ’90s, people thought a melt-up, or a sudden double-digit percentage rise, was a fine thing. Set off by some exciting event, melt-ups feed on their own gains as people rush to avoid missing out. In late 1999 and early 2000, the Nasdaq Composite Index surged to 5000 from 3000 amid the Internet frenzy. It then collapsed. Melt-ups, investors learned, can lead to meltdowns.”

Markets did move higher last week. In fact, several major U.S. indices finished at record highs on the same day. That’s a rare occurrence and one that hasn’t happened since 1998. What was behind the move? Barron’s reported investors were encouraged by mid-term election results, strong third-quarter earnings, and the European Central Bank’s promise to spend $1.25 trillion on quantitative easing.

In the FTSE 100, shares have climbed 4.7%. The biggest FTSE 100 riser – after half-year results!

Investor optimism also gained ground. Last week’s American Association of Individual Investor’s (AAII’s) Sentiment Survey found a majority of investors were feeling bullish. Almost 53 percent believed stock prices would increase during the next six months. The bears were in retreat with pessimism about market performance falling to a nine-year low. “At current levels, optimism is unusually high and pessimism is unusually low. Historically, such occurrences have been followed by lower-than-average levels of market gains,” reported the AAII’s blog.

So, is it a melt-up? It’s difficult to know. What’s really important is this: Melt-ups are buy first, think later situations which sometimes lead to melt downs, which are sell first, think later situations. Needless to say, it’s always better to think first.