I first wrote about the potential for a stock market Melt Up in 2015. And since then, this setup has never been clearer than it is today.
The stock market Melt Up is here – and so is the euphoria that goes along with it.
If you’ve been watching the markets, I’m guessing you can feel it. Sentiment is as much a feeling as it is a tangible thing. But there’s plenty of hard evidence to back it up, too.
Today, I’ll share the signs of what’s happening… and more important, what it means for your money now.
Proof of the Melt Up is everywhere today. The first obvious clue is the initial public offering (“IPO”) market.
Companies tend to come to market when times are good… or more specifically, when valuations are high.
There were 480 IPOs in 2020. That’s the highest we’ve seen since 1999. And it’s more than 50% higher than what we saw in 2014, the second-biggest IPO year of the last decade. Take a look…
IPOs were a major theme of the tech bubble. Hundreds of companies went public because money was flowing and times were good.
Many of those stocks would soar triple digits on their opening day. And the same thing is happening today in many high-profile IPOs.
Last month, DoorDash (DASH) and Airbnb (ABNB) both went public. These companies each used a special “hybrid auction” to allocate shares to investors. The idea was to have investors bid a price in the hopes that the actual IPO price would come close to the true market value at launch.
If it worked, we wouldn’t have seen these stocks soar on their opening days… But it didn’t work.
Instead, DoorDash soared 86% when it began trading. Airbnb jumped 115%. Those are high opening-day moves in massive businesses. The companies have market caps of $45 billion and $88 billion, respectively.
More important, when you put this in context with the above chart – with total IPOs surpassing 2000 levels – the point is clear. IPO euphoria is taking off in the market today. And that’s Melt Up behavior at its purest.
IPOs are just part of the story, though. According to Citigroup, overall euphoria is at its highest level since the early 2000s.
That’s according to the company’s Panic/Euphoria Composite Index, which looks at factors like margin debt and options trading. It shows dramatically higher euphoria than we ever saw during the 11-year bull market. And it’s nearing 20-year highs, too.
Simply put, everyone’s bullish. And they’re behaving accordingly.
Professional investors are following suit. The Bank of America Merrill Lynch Global Fund Manager Survey from December shows it clearly…
It surveys a few hundred money managers to get their take on the markets each month. These professional money managers are now underweight cash for the first time since 2013. And that makes sense given what’s going on.
Stocks are soaring. Times are good. And that makes cash a dead weight in your portfolio. So even though cash serves a purpose, the pros have ditched it.
I’m not kidding when I say stocks are soaring, either…
Aside from April of this year, November was the best month for the S&P 500 since 2011. Stocks jumped more than 10%.
Again, the takeaway from all of this is clear…
Market euphoria is here.
That’s not a bad thing. It’s exactly what we expected when the Melt Up began to take hold. But let’s not kid ourselves… This is a dangerous time to be an investor.
It’s dangerous because while times are good now, we know what happens next. After a furious Melt Up comes a crushing Melt Down.
Tomorrow, I’ll share how you can protect yourself from that looming risk.
Good investing,
— Steve
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Source: Daily Wealth