Filed under: Weekly Market Commentary

Melt-Up or Melt-Down?

John Lynch Chief Investment Strategist, LPL Financial

Written by Boone Wealth Advisors

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Did stocks just melt-up, setting up a possible melt-down? Friday’s sharp decline, the biggest since the Brexit vote in June 2016, might have led us to forget that just a few days ago many claimed the stock market was melting up. The strong finish to 2017 followed by big gains in January certainly made this a reasonable characterization. (Though we continue to believe stock valuations are well supported by fundamentals here.)

Concerns have now turned to whether last week’s sell-off is the start of something much bigger, or dare we say a meltdown. This week we discuss whether stocks have melted up or if they are about to melt-down.

Did Stocks Just Melt-Up?

There is no standard definition of a melt-up, a phrase used to describe a sharp and swift move higher in the stock market (think late 1990s). The logical implication of a melt-up is that stocks are stretched and poised to fall. Our friends at Strategas Research Partners have defined a melt-up as a top five percentile rally in the S&P 500 Index within six months when the index is at new highs. Based on data back to 1985, the top five percentile of 6-month performance for the S&P 500 is 21%. The recent peak in 6-month rolling S&P 500 performance, on January 26, 2018, was 16%, well short of that breakpoint.

Even if we assume stocks just melted up, it does not preclude further gains. Using the melt-up definition above, the S&P 500 experienced 13 of them since the mid1980s. If you bought the S&P 500 on all of those melt-up dates, you generally ended up doing well. The S&P 500 was up an average of 4% six months after those melt-up dates (median +6%) with gains 75% of the time. And over the next year, the S&P 500 was up an average of 6% (median also 6%) with gains two-thirds of the time. The exceptions were in 1987 and 2007, environments that bear little resemblance to today in our opinion.

Are Stock’s Melting Down?

Just one week after a possible melt-up peak, Friday’s 2.1% loss for the S&P 500 (and ominous 666-point Dow drop) has sparked fears of a melt-down. After a record run, more volatility is to be expected. The S&P 500 just set the all-time record for trading days without a 5% correction, breaking the 1990s record. (The count is now over 400 and the current pullback is at 3.9% through Friday’s close.) The S&P 500 generated a positive return every month last year for the first time ever. Although the S&P 500 endured two 1% or more drops last week, the 113-day streak without one through January 29, 2018, was the longest since the mid-1980s. Finally, January was one of the best starts to a year ever.

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Written by Boone Wealth Advisors

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