Why a Market ‘Melt-Up’ is Ahead

It’s that time of year again.

Footy finals weekend.

This usually means two Australian traditions will be high on the agenda.

A family BBQ. And a small punt.

And for the third time ever, it also means a public holiday today for all Victorians.

The ‘Grand Final holiday’ pledge was part of the Daniel Andrews’ 2015 election campaign. At face value, you would think this would be pretty popular with the community at large.

Sure, grumbling from the business sector is to be expected, but it seems like a vote winner, right?

Well, wrong apparently.

A Herald Sun poll recently found that the ‘dump it’ option was the more popular than the ‘keep it’ one.

Seems pretty strange to me.

But it appears that today’s holiday could be the most reluctant public holiday in Australian history.

Which brings me to the markets.

Because, like public holidays, usually booming markets are pretty popular events.

But this one seems very reluctant. Which provides big opportunities for brave investors. Let me explain…

The world is nervous

Make no mistake. Globally, at least, markets are booming. But you wouldn’t know it from the consumer sentiment surveys out there.

Here in Australia consumer sentiment was negative for the ninth straight month in a row.

In the US — which is in the midst of its second longest bull run ever — professional investors are starting to pare back investor expectations.

Fund manager Leon Cooperman of Omega Advisors called the stock market ‘fully or fairly’ valued.

But, he added, ‘The conditions that normally lead to significant market decline are either not present or not forecastable.

Credit hedge-fund founder Boaz Weinstein of Saba Capital, added that ‘The reward isn’t there’ in high-yield bonds. This asset class often leads equity markets and is now widely owned by retail investors who are looking to find scarce income options.

The Eurozone remains nervous.

Only Chinese consumers are optimistic right now, with a Nielsen Consumer Confidence survey suggesting it’s at its highest point since 1998.

But that’s the exception to the general world mood.

Like the Grand Final holiday, it seems we’re in a reluctant sort of bull market.

Professionals are cautious. Retail investors are nervous. And consumers are still watching the pennies, at least psychologically speaking.

For investors, this is exactly want you want. If you are in the market for growth opportunities.

It’s like this…

Before any big market crash, there are usually 12 months of enormous share price growth.

For example, in the tech boom of 1999, the technology index in the US, the NASDAQ, went up more than 100%.

At the same time the Dow Jones Index, the index of the top US companies, returned 0%. Zero.

That is what a market bubble looks like.

The most speculative parts of the market go nuts, and diverge from the general market. No one wants to miss out.

This happened in Australia in 2006 with the resources boom.

Check out the graph below:

ASX 200 Index 29-09-17
Source: Incredible Charts
[Click to open new window]

The green line shows the resources index moving up strongly even when the general market (the blue line) started to fall.

That is usually a crucial sign of a market bubble.

If we were in a market bubble or top, you would expect resources and technology stocks to be very high.

But the resources sector is in a seven year bear market. And in the last 12 months the ‘boring old stocks’ of the Dow Jones index have been doing better than the tech high-flyers.

Tech vs Old School 29-09-17
Source: Stansberry Research
[Click to open new window]

The market ‘melt-up’ is still to come

If history is any guide, we need to see the kind of share price rises that turn the doubters into believers.

It’s a sad fact that the general public tend to get optimistic at exactly the wrong time.

Clearly that time is not now.

The good news for you if you want to invest in growth is that the ‘melt-up’ phase is still ahead of you.

That will be the stage when resources will start to move up sharply, technology stocks go higher than anyone thought possible — and your ‘have a go’ neighbour makes a small fortune on some obscure biotech stock…

If this stage comes at all.

History doesn’t always repeat itself. But it sure is a good guide.

You can’t wait to feel comfortable before you start investing in growth stocks. That’s usually the worst time.

Enjoy the Finals Weekend!

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: A seven year bear market in any sector is usually a good place to look for value based opportunities. My colleague Greg Canavan thinks he has found not one but three outstanding opportunities in the beaten down oil sector. It’s definitely worth considering. Click here to find out more.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia