As major market indexes continue to set new all-time highs week after week there are increasing discussions on the Wall Street and on Main Street USA that a stock market “melt-up” has begun. The so-called melt-up phase refers to a sharp and sudden move in stock prices driven predominately by investors, both retail and professionals that have missed the prior bull rally and looking to buy before they miss the next move up. A market melt-up is often a classic sign of a late-stage bull market rally. The current trigger to this move is often favorable news that may include the following events: (1) current trade tension abates; (2) Federal Reserve and Central Bankers are accommodating; (3) domestic and global recession fears ease; (4) amble cash and credit available; and (5) professional investors are often underperforming their respective benchmarks.
Technically speaking, parabolic trends occur when prices arc upward at an accelerated pace and at a sharp and unsustainable rate. A normal 40-45-degree linear uptrend then turns into a parabolic curve often at 60 degree or more on the charts. Although it is difficult to know when a final top will occur, the buying frenzy often force sideline money to rush in to buy even at unsustainable levels. The result is almost always the same - a market blow-off top - resulting in an ensuing sharp price collapse. A parabolic move may be highly profitable for some as the potential to make a lot of money in a very short period fuels the speculative rally. However, the potential danger is the parabolic move will run out of gas, resulting in a sharp collapse often without warning.
Over the years there have been numerous parabolic moves in key markets, sectors, indexes, and individual securities. They all have the following common characteristics: (1) news are overwhelming positive; (2) major technical breakouts often occurred toward the later stage of the rally often via accelerated breakout type patterns; (3) the angle of the acceleration tends to steepen dramatically near the end stage; (4) returns are extremely strong and tends to be at the greatest toward the final phase of the rally; (5) record highs occurred at much higher frequencies than in the past; and (6) key moving averages (i.e., 10-week and 30-week), major trendlines and pivotal supports are convincingly violated on declines. Below are instances of prior parabolic moves leading to major declines including Bitcoin, Biotechnology, Gold, Housing Market, Tech/Telecom, and Energy.
The top 2 performing S&P 500 sectors from their respective March 2009 market bottoms are currently S&P 500 Technology and S&P 500 Consumer Discretionary. We recommend investors and traders monitor these two major S&P 500 sectors as the Technology sector is one of the largest market cap weighted sectors and very influential to SPX, NDX and other US indexes. Consumer Discretionary sector is also very important as this economically sensitive sector is a reflection of consumer spending and sensitive to pivotal business cycle turns in the US economy.
A brief review of the above sectors currently suggests the current trends are still sustainable into 2020. However, if they continue at their current pace, we would not be surprised to see parabolic trends developing and ensuing potential blow-off tops in the future. Three other markets that can also be influential in the financial markets are Private Equity, IPOs, and High Yield Bonds. Although their uptrends are also sustainable into 2020 if speculation develop into the current rallies, they can warn of late-stage bull market rallies.