Once again, stocks are hot. Following a drubbing late last year, benchmark indexes have been grinding higher as investors keep piling in, setting fresh all-time highs in the process. Is this another rally justified by dovish pivots from major central banks around the world, green shoots in global activity, and earnings results that are surpassing Wall Street’s expectations? Or is it something that rings alarms, a melt-up? BlackRock Inc. Chief Executive Officer Larry Fink said he thought a melt-up was a possibility, as money that had moved to the sidelines after a sell-off late last year headed back into the markets. Here’s the difference between something good and something that’s too good.
You won’t find it in a dictionary; it’s in the eye of the beholder. It’s a term traders use to describe a specific market event: a rapidly accelerating rally driven purely by sentiment, with high participation, volumes, and volatility. That is, market optimism has come untethered from fundamentals, and investors are chasing returns by jumping on an upward-moving bandwagon. A melt-up doesn’t give investors waiting to buy the dip any chances to get in -- it’s all based on momentum and, in its later stages, fear of missing out. At its most extreme, it resembles panic buying -- or the panic selling found in the more familiar market meltdowns.