Rare Melt Up Mania Brewing Behind Market Curtain?
If you've been paying close attention to the subtle signals, you may have noticed some eerie tremors shaking up underneath the surface of financial markets lately. Tremors that have preceded extremely rare but powerful "melt up" events in the past.
On Friday, the tech-heavy Nasdaq surged nearly 6% to cap its best week of 2024 as investors piled into big winners like Alphabet, Uber, semiconductors and more. The frenetic buying frenzy was fueled by growing speculation that the Fed could soon embrace an aggressive pivot to an easing cycle after the latest inflation data showed a continued cooldown.
Billionaire investor John Paulson turned up the heat even further, declaring the Fed needs to "move aggressively" with a 50 basis point cut at the September meeting rather than just 25 bps. In his view, the central bank is "a little behind the curve" based on the latest economic readings.
For market technicians who understand the signs, the ingredients often present before one of these unhinged melt up cycles seem to be rapidly falling into place.
What Exactly Is a Melt Up?
The term "melt up" refers to an extremely rare asset price phenomenon where valuations become completely disconnected from underlying fundamentals and reality itself. Driven solely by psychological forces like fear of missing out (FOMO) and unbridled greed rather than earnings, cash flow models or other metrics.
We're not talking about a typical bullish uptrend, but an absolute speculative frenzy marked by powerful vertical price ascents playing out over a compressed time period. Where triple-digit and quadruple-digit percentage gains become almost commonplace - even among companies with essentially no revenue or earnings to speak of.
These events have occurred only a small handful of times throughout market histories like the late 1990s tech bubble and 2017 crypto mania. Fortunes were undoubtedly made for those who stayed prudent about taking profits. But far more ended up giving back all their gains and more when the fever ultimately broke.
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The Common Accelerant
In each prior cycle, the spark that ultimately catalyzed a small bullish sentiment into a full-blown mania was excess monetary stimulus from the Federal Reserve. Aggressive interest rate cutting binges and liquidity injections feed the psychological "Buy Everything" frenzy that allows prices to become completely untethered from reality during melt ups.
It starts with a dovish Fed policy U-turn that emboldens the most aggressive forms of speculation to take hold as the cost of borrowing collapses. Corporations gorge on cheap debt to fund rampant share buybacks that turbocharge momentum. And cash investors begin to lever up in order to chase higher returns as earning zero in money markets becomes untenable.
This is precisely the narrative we're witnessing develop as inflation data softens and the chorus calling for an overly accommodative Fed "put" grows louder by the day.
Other Tremors Rumblings
However, aggressively easy monetary policy isn't the only precursor to these rare melt up events. Based on historical patterns, here are some of the other eerie signals taking shape:
Speculative frenzies forming in asset classes like meme stocks, crypto, AI hype, etc.
Individual stocks exhibiting trading patterns indicative of prior melt ups
Record levels of cash sitting on the sidelines awaiting the next frenzy to deploy into
Overly bullish and euphoric market sentiment spreading across social media platforms
Does this mean we're on the verge of an imminent melt up that will mint a new generation of millionaires practically overnight? Or just another overhyped bull rally cycle destined to ultimately fizzle as gravity reasserts itself?
Only time will tell. But controlling greed by maintaining prudent risk management practices with hard profit-taking rules will be absolutely vital - regardless of whether the current conditions devolve into a temporary melt up insanity or not.
Because when these rare melt up cycles do emerge, the greatest risk is often being the last one holding the bag when fundamentals ultimately return to reign supreme. As they always inevitably do.
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