"The Final Melt Up", "A Blow Off Top": Money Floods In As Investors Turn Euphoric At Triple Record High

In a historic trifecta, yesterday for the first time this century, all three US indexes posted concurrent record highs. The last time this had happened was on December 31, 1999.

 

At the same time, as the WSJ points out, the ratio of NYSE and NASDAQ stocks hitting 52-week highs versus 52-week lows surged to its highest level in years. “The last time we’ve seen levels like this consistently was in 2013, which went on to be one of the best years for stocks,” said Frank Cappelleri, executive director of institutional equities at Instinet LLC. In 2013, the S&P 500 rose 30%.

Ironically, the ongoing meltup continues even as major sellside banks from JPM to Goldman Sachs, have been warning about an imminent downturn. Less than two weeks ago, we reported that Goldman had turned outright bearish, urging clients to "sell" stocks over the next three months, reiterating a bearish call it has made for the past quarter.  Framing our skepticism, we asked whether "Goldman will again be wrong?  It's distinctly possible, in which case we expect the firm to capitulate some time in September, when the S&P is around 2,300 and urging what clients it has left to buy stocks at all time highs."

So far, the S&P appears to be distinctly headed toward that price target. Others believe that the market has indeed entered a blow-off top phase.

As the WSJ writes, for some traders, the trends suggest stocks could enjoy a sudden surge. The bump could happen once investors return from summer vacations and begin taking some cash off the sidelines, they say. U.S. stock-trading volumes have been below the 2016 average in recent weeks.

The consensus one-year target for the Dow Jones Industrial Average is now more than 20000 as of Tuesday, up from around 18860 in February just before stocks hit a 2016 low, according to S&P Dow Jones Indices. On Thursday, the Dow rose 0.6% to 18613.52. The S&P 500 gained 0.5% to 2185.79, and the Nasdaq Composite added 0.5% to 5228.40.

Others say while they believe stocks will continue to creep up in coming months, they don’t foresee a “melt-up."

The bulls like to point out the rally in stocks in the late-1990s which is often viewed as a case study for how stocks can shoot up even after reaching new highs. Between when the Nasdaq Composite hit a record high in November 1998 and the index’s peak in March 2000, the index more than doubled.

John Linehan, portfolio manager of the T. Rowe Price Equity Income Fund, says typical melt-ups come when exiting a recession, when a significant stock-market overhang has been eliminated or when investors are fundamentally rethinking how to value stocks.

 

In the case of the late-1990s, the U.S. market was shaking off the emerging-market crisis and the collapse of hedge-fund firm Long-Term Capital Management and its reverberations across financial markets, and focusing instead on a batch of new, disruptive technology companies. Furthermore, investors were increasingly ignoring long-held beliefs about measuring a company’s value based on its earnings in favor of metrics such as price-to-eyeballs, or how many page views a dot-com company received in a given month.

 

“Clearly we’re not coming out of a recession, and it feels like there’s still many unknowns out there,” Mr. Linehan said, referring to the present. Coming risks include the pace of economic growth, geopolitics and the U.S. presidential election, he said.

That said, there has been a change, as market multiples have now repriced to levels not seen since prior market bubbles: as the WSJ adds, what does point to a melt-up situation, some analysts say, is a shift in how investors are valuing stocks. Stock prices compared with their past 12-month earnings are at elevated levels compared with their 10-year averages. But many investors are justifying buying more stocks because valuations based on bond yields, which remain near unprecedented lows, suggest multiples could climb even higher and stocks still are relatively attractive.

In other words, if yields drop further, use the Fed model to justify buying; if yields go up, the recovery is finally kicking in and it's time to buy even more. Meanwhile, the real reason for the meltup is simple: $200 billion in monthly fungible QE by central banks.

And, as always, at some point the punch bowl is always taken away.

Even the strong gains in the late 1990s gave way to steep declines. In the year following its peak, the Nasdaq Composite lost more than half its value, and it took 15 years to return to its pre-tech boom highs. Some analysts now say they worry most of the gains from this rally could be in the past—that the melt-up has essentially happened.

One persistent investor type is the BTFDer, such as Stuart Hoffman, chief economist for PNC Financial Services Group, who said that “I think the next 5% is more likely to be down than up." Which for him is good news: "That’s probably an opportunity to buy." '

Considering that activist central banks now step in at even a modest, low single digit dip in the market, it's probably not a bad idea.

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Finally, for all the talk about this being the most hated rally, in a note titled "the Final Melt-Up"...

... BofA' Michael Hartnett points out that funds are now flooding virtually every asset class (except the dreaded money markets which have been spooked by upcoming regulation). To wit:

  • Equities: $6.5bn inflows (first inflows in 4 weeks) (note divergence between $10.0bn ETF inflows & $3.5bn mutual fund outflows)
  • Bonds: $9.8bn inflows (inflows in 17 of past 19 weeks)
  • Precious metals: $0.9bn inflows (inflows in 10 of past 11 weeks)
  • Money-markets: $3.6bn outflows (largest in 7 weeks)

Equity flows:

  • EM: 6 straight weeks of inflows ($1.3bn)
  • Europe: $2.7bn outflows (27 straight weeks of outflows)
  • US: $4.9bn inflows (first inflows in 4 weeks)

What else BofA sees:

  • Risk-on weekly flows: equity inflows ($6.5bn), credit inflows ($7.0bn), gold inflows ($0.9bn) & money-market outflows ($3.6bn)
  • Bulls on the rise: BofAML Bull & Bear Indicator rises to 4.3 from “buy signal” low of 1.6 (June 28th) (Chart 2); sentiment getting more bullish but not yet at an extreme; stay  long risk until B&B approaches “complacent” territory of 8.0
  • Cyclicality on the rise: largest inflows to Japan equities in 7 months ($1.6bn); largest 4-week inflows to financials in 8 months ($1.2bn); largest inflows to tech in 4 months ($0.5bn); investors still love credit but are now rotating to economic-sensitivity in stock markets
  • Private clients turn cyclical: BofAML GWIM client ETF flows show profit-taking in defensive leaders of staples/telcos/utilities, rotation to cyclical laggards of Europe/Japan/EM, industrials/materials/financials (Chart 3)...likelihood of melt up in risk assets into Jackson Hole growing...likely followed by jump in yields.
  • EM melt up: big inflection point in EM debt flows (largest 6-week inflows on record of $18bn or 6% of AUM) now mutating into EM equity flow inflection point (Chart 1)