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The Melt-Up

Arun Chopra CMT, CFA profile picture
Arun Chopra CMT, CFA


  • The market started melting up in September of last year.
  • Another way to think about this is the market is getting away from the Fed.
  • Many stayed bearish all year long, repeating the same risks that have existed for many years versus objectively looking at price action.
  • See how Fusion members were in front of the move.

So the market is melting up....

Yes, we have all heard the term in the past 4 months or so. So much so that I saw a lot of perma bears dismiss any possibility of higher prices - instead, they saw further proof of a suckers' rally and an eventual crash.

But nothing could be further from the truth. Just because the search term went trendy is hardly a reason to dismiss it. Especially in the later stages of a bull market.

I've written a lot about the differences between this market and past overall peaks, particularly '08. One of the most important conditions has obviously been monetary policy. This is part of the reason I was able to see the early 2017 uptrend for what it was: an impending melt-up.

First, just take a look at where the Fed is relative to '08 on rates and financial conditions. Night and day.

That did not stop speculators, however, from really forcing the issue in the back half of the year. One thing I try to stress with my work is to think different and to try to do behaviorally what others aren't. One big behavioral component of the 2017 market was related to groupthink and seasonality. If you haven't seen it, here's the chart everyone was looking at:

To be clear, The Leuthold Group is a group I have a high level of respect for. They just happen to have one of the cleanest charts on the phenomenon. The net, however, was littered with some of the most unbelievable '87 crash analogs week after week after week.

The bottom line not only was everyone looking for a "crash" or "pullback" just because of the calendar, but more importantly, they actively made that bet. One big component of price action is to know where others are positioned. I have

This article was written by

Arun Chopra CMT, CFA profile picture
Arun S. Chopra CFA CMT MBA began as a research analyst in the Biotech sector. Arun has worked in wealth management, specializing in portfolio construction and hedging solutions, with a special emphasis on alternative investments. He has worked closely with alternative asset portfolio managers, hedge fund traders, and investment advisors on everything from single stock processes to longer term allocation decisions. He has earned both the CFA and CMT charters, with an MBA from New York University's Stern School of Business. His undergraduate education includes a study abroad program in micro and macro economics at Oxford University. His work has been published in the MTA's Technically Speaking. Outside of Finance, Arun spends considerable time in the independent film industry, having associate produced two full length features, Punching at the Sun (Sundance 2006, Best Picture SF Asian American Film Festival 2006 ), and Chee and T (Best Comedy LA International Film Festival 2016).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (33)

Sensible Investor profile picture
Informed investors don't generalize about "'markets." They buy stocks, not markets. So, which stocks will do well? A good investor would be best served to ignore generalizations and find companies selling below book, low PE ratios, and fast growing. In any economy, there will always be outperforming assets, and those who spend the time searching for them will do well. I like NVR, PRKA, EBSB, V, HD, ADVM, and so on. I use the new highs list to locate winners. I don't get stuck on simplicity or generalizations.
AuCoaster profile picture
Very few companies do well during a cyclical bear market decline.
Most stocks, even the best companies, decline substantially.

The economy and general market conditions influence which investments will be best. So, it is important to pay close attention to the economy and general market conditions.
Arun Chopra CMT, CFA profile picture

Experienced investors know a recession/bear market creates havoc for equity. 80+% of stocks drop because no one knows where the bottom is. Having said that a lot of money has been lost/missed by reading too far into the macro during up cycles. It is one of the great challenges for those who want to do more than buy and hold for the next 40 years.

With respect to companies, please see this article here and my service description. I run 8 strategies. Price to book and P/E to me are two of the most overused least effective valuation tools out there in any time frame that is meaningful (even after adjusting for accrual accounting issues with each-most basic software doesn't do this).

GARP (which you described) is superior but in a bull market as operating metrics, momentum, sector exposure etc leave the 'value' players in the dust.

NVR has been a beast, rather than using the new high list I like to figure out what makes the new leader list (from fundamentals) and then go after those while they are technically setting up. They will be somewhere around the 65-80 ranking area if you laid out all the companies that fit those parameters (stocks making new highs etc).

Cash King Stock Article:


Service link (please see trades in 2017):

JOE STERN profile picture
Thanks for the link. Your chart of P/E confirms my view that 2000-2009 was one bear market with a correction in the middle. Not everything fell at once, it happened in stages: First the internet stocks, then most other stocks, then the housing market, then the financials, then all stocks. The high P/E now is justified by the low interest rates which have started to creep back up just as estimates for earnings are increasing. We live in interesting times.
Arun Chopra CMT, CFA profile picture
Yes and all bear markets are not similar either. The 2000 experience showed many energy stocks that actually gained over the cycle as oil was around 11 dollars and value stocks were dirt cheap. 08-09 was obviously a systematic event, unlikely to be seen again which naturally affected all stocks and sectors. Uber '08 'the next crash you just wait' bears are going to be very disappointed when this bull eventually ends.
Sensible Investor profile picture
Can you be more specific? Take a chance and predict which companies will do well, or not? Visa did well in down cycles, and banks will do fine in rising rates.
JOE STERN profile picture
Your article is a welcome change from so many on SA that say valuations are too high. I think they are reasonable given the low interest high growth environment I anticipate for the near future. My main concern is that the yield curve may invert in a year or two, causing a recession a year or so later. Focusing solely on the 30Y yield to measure interest rates ignores the rest of the yield curve and its slope. A recession is usually preceeded by an inverted yield curve and a falling stock market.
Arun Chopra CMT, CFA profile picture
Hi Joe,

Thank you, it took me some time to get to this view (rates vs valuations) but certainly getting there in general has proven more important. I mentioned above I am giving a presentation shortly (will announce it) that will dig deeper into this very dynamic when accounted for earnings growth and fed action. I think the numbers will surprise most people.

With respect to the yield curve check this out I went down that rabbit hole a while ago, this is the basis for my multi factor 'topping' model so to speak. High valuations are not a reason to sell (especially given rates) but they do require vigilance.

Maybe perma bears were concerned about the possibility of war.
Arun Chopra CMT, CFA profile picture
Yes good point. That actually was something that came up numerous times during the year. Another 'prediction' that was hyped by the news but unconfirmed in most charts. The South Korean index actually broke out to all time highs during 2017 (and remain there) while gold of course traded sideways and the yen was relatively subdued. Had one only looked at price they'd have had no idea there was even an 'issue'. I stressed numerous times intra-year to ignore that noise primarily because of the above.
GalXZ profile picture
Trump Train Express!! Amazing run.
I really hate the term melt up. It is just a term bears use because they have been and want to save face. If this bull market continues for the next year or two, are they going to call it a "melt up," or will they call it some other meaningless term?
forget about labels or terms - the question is, do you think this current trajectory is normal or sustainable? If so, I've got a bridge to sell you.
It will continue until it does not.
Look at the price charts for every market in history that goes vertical (example- tech stocks) and see what happens after they go vertical. Therein lies the answer to whether it is sustainable.
excellent comment about groupthink regarding seasonality mid year 2017 a run. thoughtful article, look forward to more!
Arun Chopra CMT, CFA profile picture
Thanks Redoaks much appreciated.
This is the 9th year of a bull run. It has to end sometime. When is anyone's guess. I think there has to be some trigger and you can't predict random triggers. Enjoy the ride while it lasts and hope you can get out of the way when it drops or just ride it through.

Most of the market trading is run by software.
Tony Hayes, CFA profile picture
Dear gensearch2,

"Most of the market trading is run by software." Herein lies the problem. The software is programmed by people, who have absolutely no clue how the market works, and thus suffers from GIGO. For a fundamental approach, have a look at:


Kind regards

Arun, I find it interesting that a CFA is so focused on charts and technicals. In June the Fed will start to unload the bonds they have been buying, what are your thoughts on that?
What is your outlook for the next two years?
Arun Chopra CMT, CFA profile picture
Hi Yek,

So the CFA is definitely not focused on charts and technicals. If anything they are fairly dismissive of the approach. The CMT (Market Technicians Association) designation is the lesser known, technically orientated body. Technicals are often confused for just price patterns but there is decidedly more such as market breadth, intermarket relationships, psychology and so forth. Hopefully the video showed some of that.

I use both disciplines together. I find the CMT to be much more useful when looking at macro assets for a variety of reasons.

With respect to the fed unwind, this has naturally been on my radar ever since the announcement of intent. In some way this led to the melt up as well as those who understand the real effect of a such a move (if done in meaningful size) probably extrapolated a bit too soon (I was guilty of this at first as well).

I am doing a virtual presentation shortly, will announce date/time to my S.A. followers, in it I cover past market tops and what I see going forward. It should do a decent job of answering your 2-year question.

The short answer is the fed is still far far behind the curve but I will cover what I am watching for changes in the dynamic that drove '17, not only from them, but more importantly from market signals that personally matter much more to me.
It doesn't take a genius to see that the Fed is behind the curve. Interest rates are at 1.5% for G-D's sake, 9 years later after the market has quadrupled . Inflation is running 4-6% a year . They are behind the curve by design. You make it sound like they don't know that they are behind the curve
Arun Chopra CMT, CFA profile picture
You overall attitude is a strong reflection of why and how bears have been completely run over this cycle. Accept where we are first, then realize you have zero impact on it. From there try to figure out a third move.
so basically if everyone were to keep thinking that the market will crash, it will just keep on going up forever, just because. OK I get it....
Arun Chopra CMT, CFA profile picture
Yes and no. I'd be careful of a singular takeaway. In '17 it was the combination of mass crash assumptions (on flimsy methods-seasonality and a 'high index' price) meeting strong global price action, breadth, and then bears actively shorting into each high. Again it was a very unique moment which is why I focused solely on it that week in September.

As Gundlach famously said 'consensus can often be right' but in this case we had a perfect storm of bear consensus with a market that paid zero attention to every piece of much stronger evidence to the contrary.

I can understand your skepticism towards behavioral psychology and its impacts towards financial instruments but ultimately everyone under the sun has been looking for a crash since the '08 crash, and we haven't had one. None of those people were looking for a crash in 05-06-07 etc. This is part of human nature.
thanks for your response
This is patently false. I for one knew that something was amiss in 05-07. And many people were warning of a bubble in home prices.I just don't think many put one and one together and forecasted how it would affect the equity market
What about short signals after the first two weeks of 2018?
chrave1956 profile picture
Who here on SA is stepping up to admit they were wrong about the market tanking wherever the Fed started to take the punch bowl away....or if Trump was elected ... No one it seems !
you propose such a simple question as if all the problems in the world have already been fixed, or that they should be ignored if the market goes higher. the government hasnt been functioning at 100% capacity over the past year as problems and potential crisis are being ignored and/or kicked down the road. none of which will end well. contrary to the belief of some, the assumption that Trump has some sort of magical omnipotence is not grounded in reality or fact, but only social media says otherwise.

The current vacancies in government are intended to starve them of oxygen. Once things eventually collapse into chaos, his cronies (only those who pledge unconditional allegiance to him) will profit from cleaning up the mess. Anyone who feels safe, secure or content with the current destruction of democracy is simply not paying attention, or too jaded to listen. I wouldn't be so quick to measure the health of this country by the performance of the market. Many devastating trends, like a shrinking middle class, show no sign of changing. Instead of rationally addressing a problem, it is much easier to fuel anger, hatred and blame for political gain on social media. very sad.
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