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How to Ride the ‘Melt-Up’

It’s starting to feel like 1999 again.

Not in the ‘Party like it’s…’ kind of way, but in the ‘stock bubble’ kind of way. It’s called a Melt-Up, and it happens at the end of the bull market when everyone on your block and their yellow dog is suddenly buying or talking about stocks. It’s the herding in of otherwise wouldn’t be investors who are afraid they are going to miss out on the market’s rapid rise. It’s what happens right before the lights go out on the fun and there’s a market Melt-Down, crash, or major correction. 

Let’s look at how we know we are actually in a Melt-Up.

  1. There’s a kind of stock mania everywhere you go. References to the stock market in unfamiliar publications and media. Talk of the bull market by those around you at the store, at work. Remember the last high of Bitcoin when suddenly everyone was talking about Bitcoin when six months earlier they didn’t even know what it was? Like that.
  2. High investor sentiment. Consistently above 50% is how the professionals gauge it. This week we are ending at around 30%. Of course it fluctuates all the time, but this could indicate there is still room to run in this market.
  3. There is a high inflow of both new money into the market, especially ETFs, and a flood of new online trading accounts set up.
  4. There is usually a strong focus on one area of the market. Like the Bitcoin example earlier this year, or the most famous of all, the tech stocks (aka the ‘Dot Com Bubble’) that began it’s burst in March of 2000. Before the burst, however, there was indeed a Melt-Up. The NASDAQ, which usually travels in the general path of the Dow Jones and is the market that trades many of the tech stocks, suddenly diverged and drastically outperformed the Dow.

This is the Dow Jones compared with the NASDAQ July, 1999 to March, 2000.

 

This is where we are today from November, 2017.

 

See the similarities as the NASDAQ is beginning to launch into orbit away from the Dow? It certainly feels like the mid-stage of a Melt-Up.

So how do we proceed? One, with caution and ownership of those that are driving the NASDAQ higher: strong tech companies.

Two, remember to not be greedy and maintain smart position sizes relative to your portfolio. This could be the final push of this bull market and if history has taught us anything … one with incredible gains.

About Deran Jay

Thirty years experience in business; Publishing, Management and Investing. Writing for themoneybeat.com allows me to blend my experiences and passions together to help others build their financial future.

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