The October Stock Market Melt-Up

On 12 October 2007, both the Dow Jones Industrial Average and the S&P 500 traded at their highest-ever level. A couple of days later, they both fell. And the start of the market panic of 2007/08 ensued.

Both the Dow and the S&P 500 have almost doubled in value compared to a decade ago. And it’s made analysts question whether the Dow is in the ‘melt-up’ phase before it crashes once again.

The Aussie market, on the other hand, never quite recovered. Cheap credit in the US flowed into stocks, and in Australia it went straight into the housing market, which I covered yesterday.

While in the US it seems like everyone is making money from the stock market, it’s a very different story in Australia, as you’ll see below…

Our major index, the S&P/ASX 200 [XJO], is stuck at 5745.60 points — a long way off its pre-market panic high of 6754.10 points. That makes the current market very frustrating for both short-term traders and long-term investors.

Matt Hibbard, editor of Total Income, wrote to his subscribers last month:

If the market has you scratching your head at the moment, you’re not alone. For over three months, the market has struggled to find any direction at all. Up one day, down the next. This week, the market gave up any gains generated since the start of the year.

It’s the sort of market that can bury a short-term trader. Just as they get set in a position, the share price reverses and throws them out of the trade. While individual losses might be small, they soon add up to something larger.

Repeat this process over many months and you’ll burn up a lot of capital. It’s not just money; there’s an emotional toll as well.

For a short-term trader hoping to generate capital gains, there’s a good chance they’ll have little to show for the year. However, while they might not have seen much in the way of capital gains, income investors have been able to pick up a ready supply of dividends.

A runaway bull market usually benefits both types of investors. But making money when the market is going sideways (or down), as it is now, can be much trickier.

Matt has spent the past 12 months building up a portfolio for his subscribers that produces returns even in a sideways market. You can click here to read his latest report.

And then there’s the US

Last week the Dow Jones notched up its 46th record close for 2017. The S&P 500 put up its 43rd record close for the year. To boot, both indices have seen six record closing highs in a row — the longest streak of record closes in 20 years. The NASDAQ has racked up 55 record new closing highs this year.

Believe it or not, that’s not the record number of new highs. The years to beat are 1964 and 1995, in which the Dow had a record number of new highs — 62 and 69 respectively. 

To put 2017’s incredible streak in perspective, the Dow Jones is now 24.15% higher than it was on the day of the US election in November last year.

Yet the near 25% gain for a major global index has analysts scratching their heads, telling the US market that this euphoria is part of a ‘melt-up’ phase. In other words, that which comes before the market crashes…

A market melt-up is best described as a time when investors abandon all common sense.

Generally, you’re looking at a rapid rise in stock prices. Companies don’t have to improve their financial data. The general macro economic outlook doesn’t matter. A melt-up occurs when there’s a last charge from investors rushing to get into stocks so that they don’t miss the rising tide.

Given that the Dow is sitting at 22,761 points, it’s entirely reasonable to expect it to push to 23,300 points. Think that sounds impossible? It would only require a 2.3% rally. In fact, since 8 September, the Dow has rallied by 1000 points. Eking an extra 600 points in a melt-up phase is easy.

I would anticipate a similar 2% or so gain for the S&P 500. Again, a 60-point increase to 2600 points is just shy of what the index managed over the previous month.

The problem for investors, however, is that market melt-ups are just as dangerous as market panics.

Relentless and unsustainable stock price rallies end badly. They aren’t backed by an improvement in a company’s financials. Practical investing habits are dumped in the fear of missing out.

For most of the year, experts have suggested that the US eight-year bull run would end.

However, we’re now into October in a year ending in the number ‘seven’. Sceptics suggest that this month is when the heat will be finally taken out of US markets. Chances are we could be looking at a US market correction of 15–20% before Christmas. For a major index like the Dow, that’s a 3414–4552-point drop.

I have no doubt that, when the US market corrects, it will take the Aussie market down with it. Luckily for us, our market hasn’t joined in the crazy euphoria taking over the US. Which means that, if you follow some simple investing ideas, you should be able to avoid the brunt of it.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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