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Melt-up!

Folks, as I’m sure you’ve seen by now, we are in the midst of a power move. The markets opened with a bang this morning, and early in the session it’s shaping up like it could be one of those days where we close 500 points higher in the Dow. I’m calling this a melt-up scenario—let’s break down the perfect storm of events that’s behind it.

First, we have news from Europe that they’ve accepted their fate. Banks across the pond will take a 50% haircut on their Greek debt, and the EU has approved a $1.4 rescue fund for any problems down the road. This is their bailout, and the sword of Damocles that had been hanging over the global marketplace has been taken down. Let’s not be rash and mistake this for a conclusion to the European debt saga, but let’s rejoice that a resolution has been found that will hopefully lead to a more stable Europe going forward.

Second, the first-look GDP number came out this morning, and it came out surprisingly well: the economy expanded at a rate of 2.5% in the third quarter. Could this number be revised down at some point? Absolutely. Does this mean the problems with our economy are over? Absolutely not. But it does seem to mean that the threat of a double-dip recession is at bay for the time being. And as long as my fellow Chicagoan has his job, that’s, about all we can hope for.

Third, we’ve got earnings that continue to sizzle. DuPont, Exxon, Shell—they’re all absolutely crushing the Street. The more and more positive reports we see, the more and more it proves to me that the lowering of expectations had gotten too low.

And fourth is the fact that, because of the T+3 settlement with stocks, today is the last day that portfolio managers can buy and mark their positions by the end of the month. If you listen closely, you can hear a collective “uh-oh” coming from Wall Street, because there are a lot of portfolio managers out there who misjudged this market. The fact that this has been the best month for the stock market in a decade means they’re going to be putting money to work in a major way today. I call this the country club effect: these portfolio managers need to show they’re outperforming their benchmark, otherwise they won’t get the bonuses they need to pay their membership dues. That’s going to be good for the price of stocks today.

Very rarely do we see a perfect storm of events like this, and even more rarely do we see a melt-up scenario where this kind of rush to risk is practically being forced to take place. I told you to look for valuation while the Cassandras of the world were preaching doom, and hopefully you did. Roll that protection up and buckle your seatbelts—this could be one of those days we talk about for a long time.

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