Investing Advice: Is a Melt-Up Coming?

Posted On January 19, 2018 11:44 am

The stock market has started 2018 as the strongest performance in over 20 years, with the S&P 500 Index up nearly 5% in just the first 14 trading days.  If it keeps up that pace, it would rack up a whopping 160% for the year. Today’s investing advice will explain what to expect in this environment.

While that’s highly unlikely, the quick bounce back from Tuesday’s sharp reversal shows investors are still willing to be the slightest pullback and have a seemingly insatiable appetite for stocks.

This led the Wall Street Journal to ask What to Expect if You’re Expecting a Melt Up.

U.S. stock benchmarks have been rallying hard, with the Dow Jones Industrial Average shooting through both 25000 and 26000 already this year.

Stocks can’t rise forever, but the bad news for bears is that few clear “sell” signals have materialized, technicians say.

The S&P 500 advanced 1.6% last week and is already up 4.2% in 2018. Extrapolating the year’s first nine trading sessions into a full year, the benchmark is pacing for an annual advance north of 160%, according to Instinet.

While no one expects gains of that magnitude, the early-year swell calls to mind how bull-market rallies tend to spike hard before keeling over. If stocks are “melting up,” a phase used when gains are disconnected from business and economic realities, there could be much more to come. GMO’s Jeremy Grantham recently said U.S. stocks could rise as much as 50% before flaming out in spectacular fashion.

A volcanic final phase for stocks would be consistent with the bookend-like shape of previous bull markets, as we noted in our Morning MoneyBeat newsletter Tuesday. On average, roughly 40% of gains accrue in the first 12 months and an additional 32% pile on during the final 12, according to Longview Economics.

Market watchers’ perpetual worry is that prolonged price gains carry benchmarks so far, so fast that they become “overbought,” or vulnerable as prospective buyers wear thin.

Yet stocks appear to be gathering more steam, not losing it. One-third of S&P 500 ended Friday at their highest prices in at least a year, the strongest “breadth” reading since 2013, according to MKM Partners. At least nine out of ten stocks within six S&P 500 sectors (consumer discretionary, health care, materials, energy, industrials, telecom) last week coasted above their 50-day moving averages, another rare show of strength, according to Bespoke Investment Group.

There’s no surefire gauge to predict the next wobble but history suggests that a buyable dip will arrive before the ride is over. Take 1999, when the S&P 500 had a 12% correction before ending the year up 20% and peaking.

“Even melt-up phases have pauses/breaks,” Longview writes.

 Related: These 2 Stocks Are Great Picks in the S&P 500’s Hottest Sectors!

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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