Melt Up

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21 Aug, 2024

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A Melt Up is an economic phase that causes a sudden rise in the prices of stocks or bonds, causing them to be highly inflated. It mainly occurs due to unexpected surges due to market forces that tempt investors to hoard stocks.

In a melt up rally, the traders tend to be bullish. Plus, the traders in short positions also switch positions and pick up stocks instead of selling. As a result, they have made huge returns from this situation. However, the melt-up boom can cause a fear of missing out (FOMO) among traders.

Melt Up Meaning

Melt up, in finance, refers to the market scenario where the prices of the equities start shooting up, causing the investors to buy more stocks.
Here, the investors intend to profit from the situation by buying stocks at this phase until they reach the highest. Once reached, they take short positions.
In addition, bearish traders also start buying stocks by ignoring the stock's fundamentals and key economic indicators.
Some examples of them include before the Great Depression of 1929, the dotcom bubble, and the post-COVID-19 crisis. In the end, they all lead to a considerable price downfall.

Melt Up Explained

A melt up refers to the situation in stock markets where the stock prices shoot up, ignoring market indicators. Thus, in this situation, it manipulates the investors to pick stocks so that they can make huge profits out of it.

There have been various instances that caused such situations. However, the origins of the stock market melt up became popular in the dotcom era. Before the bubble burst, investors were excited to buy and hold technology stocks. They saw the ultimate potential of higher gains in these equities. However, after the bubble exploded, the market saw a meltdown. A similar situation occurred before the Great Depression and post-Covid 19 crisis. In the former case, the market witnessed a 10 times plus plunge in stock prices. In 2021, the melt up stocks suddenly rose, forming a bubble. But, by 2022, the meltdown or drop had already begun.

In the practical scenario, investors look at the financial and technical side before trading any stock. Also, they consider various economic indicators, such as leading and lagging indicators, to determine the economic phase. However, there might be a situation where an individual will ignore them in front of the current market scenario. And it arises when stock prices rise unexpectedly. Thus, investors who expect the market to rise further will get motivated to buy stocks. In this process, the bearish players also reverse their position. They also dive in to buy stocks. As a result, the market surges. However, there are situations where a rise might not be the cause for a boom.

Examples

Let us look at the examples of melt up stocks to comprehend the concept better:

Example #1

Suppose XYZ Ltd is a firm that has always seen a consolidation phase in the market. Their shares barely saw a minimum rise in the past few years. However, suddenly, in the past week, the equities entered into a stock market melt up. Besides, all the similar stocks experienced the same rise. As a result, the investors (buyers and sellers) intended to buy stocks. This phase continued for the next few months. But, the support level became heavy, and traders could not hoard more stocks. Thus, there was a heavy sell-off as investors sold their shares to cover their costs.

Example #2

According to an article on January 22, 2024, Ed Yardeni predicts a possible melt up in the stock market after the S&P 500 hit record highs. He assigns a 20% probability to this scenario, as investors continue to bid up technology stocks. Yardeni believes the market would respond by staging a melt-up with technology stocks leading the way, but it wouldn't last forever and would likely end painfully for investors. The Fed expects to cut interest rates three times this year, but market expectations are more dovish. Yardeni believes the most likely scenario for the stock market is a Roaring 2020 boom lasting several years due to a surge in productivity growth.

Melt Up vs Meltdown

Although both concepts have no involvement with economic indicators, they do have wide characteristics. So, let us look at the differences between them:

Key Points	Melt Up	Meltdown
Meaning	It refers to a situation where the stock prices of equities see a high rise that tempts the investor to buy more.	A meltdown is a phase where investors witness a downfall in the market.
Objective	To encourage investors to invest more in the stock market.	It intends to cause panic selling by the investors, causing the graph line to fall.
Occurrence	It can happen either through FOMO (Fear of Missing out), intuition, or any unexpected event that can lead to buying.	It occurs due to negative sentiments, panic selling, or other factors that can cause traders to enter bearish situations.
Post Effect	It leads to a meltdown as investors sell the quantities once they reach their maximum price level.	Meltdown tends to cause huge losses to the firm as the capital invested is removed. Also, it impacts other sentiments of the market.
Examples	Before the Great Depression of 1929 and 2021, a melt up occurred after the COVID-19 crisis.	An example of a meltdown is the 2007-08 recession.

Frequently Asked Questions (FAQs)

What triggers a melt up?

There can be various reasons that can trigger a melt up in the market. Let us look at these factors:

● Trader's intuition against a particular stock, industry, or sector
● Positive events or news for a company indirectly related to other firms.
● Macroeconomic factors like changes in government policies, reliefs, and more.
● Speculative buying or technical analysis.

What happens after a stock melt up?

Although there can be various instances after a melt-up, some of them are listed below:

● Market correction or reversal in the current trend.
● A rise in the volatility or uncertainty in the market sentiments.
● Sudden selling phase for profit-taking situation.
● Implementation of new policies by the government and others.

How long does a melt up last?

The duration is not fixed, as no one factor causes it. It might last a few weeks or months for some economies or markets. In contrast, some nations might witness this rise for up to a year.