What is the market Melt Up theory?

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Back in December, the New York Times published 5 reasons we may see a financial crisis soon. Many investors in the United States currently feel as if the country’s stock market is close to crashing, even beyond December’s plunge – as reported by the New York Times in early January and Investopedia early February. In fact, some investors argue we are on the verge of a “Melt Up” – the idea that the market will grow very large very quickly before collapsing. The phenomenon is being pushed by some news outlets including Bloomberg and CNBC.

The current state of the market has been relatively stable, even exceeded some expectations. The New York Times reports late January that this is partially due to the Federal Reserve’s reassurance that it will keep interest rates low. Proponents of the Melt Up theory point to slowly rising interest rates as evidence that a melt up will occur. One of biggest proponents of the Melt Up theory is the Stansberry Research publishing company. They offer investment advice for a fee. They held a promotional event last October (described here on Medium) to gain subscribers. Their biggest selling point seems to have been their research, the evidence of which points to a Melt Up.  The Melt Up idea was soon-after covered by the Daily Wealth three days after the event and again in November. Daily Wealth is an investment advisory founded and edited by Dr. Steve Sjuggerud and is published by Stansberry Research. You can watch Dr. Sjuggerud promote the Melt Up idea here. As a side note, the Melt Up theory has been subsequently covered by  CNBC (with the earliest coverage I could find being on Nov 28), The Guardian (earliest possibly Jan 4), and Bloomberg (earliest possibly being Jan 16).  Geoffrey Caveney published a critique of the theory on SeekingAlpha on October 20, 4 days before Stansberry’s large promotional event.

In their promotional event, Stansberry Research points to many numerical graphs and history data as evidence that a Melt Up is coming. This type of market analysis is known as Technical Analysis because it is based mostly on statistical market trends rather than intrinsic value. However, it has been speculated that technical analysis may lead to self-fulfilling prophecies. A group of people may enter and leave a market in unison based upon the same statistical analysis leading to additional people entering or leaving the market which further validates the predictions by further increasing or decreasing the temporary value of the stocks. There are some analysts who believe the Melt Up phenomenon is a self-fulfilling prophecy – for example here and here. Indeed, subscribers to Stansberry Research get access to a list of particular stocks to invest in during this Melt Up as well as times to sell that stock. This begs the question whether or not those who predict a market Melt Up and subsequent crash are in-effect helping induce the Melt Up and subsequent crash.




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