Is a Market Melt-Up Looming?

Ice cream melts. Snow melts. You may have seen someone melt down emotionally or even melted down yourself. Right now, markets may be melting up in a sharp, emotion-driven improvement in performance. Is this good for your portfolio?

Last June, The Wall Street Journal blog described this stock market phenomenon. “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 … 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 5,000 from 3,000 amid the Internet frenzy.”

We all know how the dot-com bubble popped: “Melt-ups, investors learned, can lead to meltdowns.”

Until last week’s sell-off, markets moved undeniably higher since mid-October. Several major U.S. indexes finished at record highs on the same day; that hasn’t happened since 1998.

What was behind the move? Barron’s reported that mid-term election results, strong third-quarter earnings and the European Central Bank’s promise to spend $1.25 trillion on a bond-buying stimulus program encouraged investors.

Investor optimism also gained ground, at least before Wall Street’s recent hammerings. In November the American Association of Individual Investor’s (AAII’s) Sentiment Survey found that most investors felt bullish. Almost 52% believed stock prices will increase during the next six months; that percentage still holds at better than two out of every five investors. The bears retreat these days, with pessimism about market performance still flirting with a nine-year low.

Spencer Platt/Getty Images

Spencer Platt/Getty Images

“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 blog.

Danger ahead? What’s your choice but continue the ride? Your money has to go somewhere, and bonds, commodities and real estate are all low.

Stocks certainly seem to lead the charge, now and historically.

Many factors are in place to stroke the boilers of Wall Street even hotter: strong and continuing corporate earnings and investable cash, international competitiveness of U.S. companies, growing American energy independence and slowly rising domestic consumer confidence.

The S&P hasn’t corrected – that is, dropped more than 10% – since 2011. For almost three years now, the market has never been in negative numbers for a complete calendar year. In the last 30 days before the recent sell-off, the S&P 500 and Dow Jones Industrial Avenue gained almost 10% and the Nasdaq more than 11% since the sharp, temporary market dip of mid-October.

So, are we in a melt-up? Or bolting headlong toward one in a clattering train? Difficult to know.

What’s really important – and practical to realize – is that melt-ups are buy-first, think-later situations that sometimes lead to melt downs, which are sell-first, think-later scrambles.

In investing as in most else, it’s always best to think first.

Jonathan K. DeYoe, AIF and CPWA, is the founder and president of DeYoe Wealth Management in Berkeley, California, and blogs at the Happiness Dividend Blog. Financial planning and investment advisory services offered through DeYoe Wealth Management, Inc., a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual. For your individual planning and investing needs, please see your investment professional.

Follow Jonathan K. DeYoe on Twitter at @happinessdiv

Follow AdviceIQ on Twitter at @adviceiq.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.