It’s literally the opposite of a melt down.
So then wouldn’t we just call it a rally?
We would not. Some rallies are called melt up’s for a reason.
A melt up happens when the market starts moving higher for not the best reason. That doesn’t mean stocks are moving up for a bad reason — just not one that has much to do with improving corporate fundamentals.
A rally happens when positive developments in the broader economy or in the outlook for a stock — or group of stocks — brighten the outlook for stock prices. In that case, investors start buying more stocks because they have a strong conviction, or a real conviction, that stock prices will rise meaningfully and they want to cash in on those gains.
But a melt up happens when investors start buying stocks not really because they see improving profits that weren’t reflected in prices, but either for idiosyncratic reasons that have to do more with optics than anything else.
First off, you keep hearing bond yields are at unprecedentedly low levels. They are. There’s almost no real return with safe bonds. So money has steadily flowed into stocks, creating more demand than supply for shares.
But how about those optics? Sometimes at year-end, money managers want to show their clients a strong position in the stock market, so they buy a few more shares. You might ask, 'but won’t that create risk that the clients ultimately won’t like, as the managers buy more stocks that are losing their upside?' The answer is yes, but each manager is only probably adding slightly to their positions. But if everyone does this, then again, we have huge demand for stocks.
Or sometimes, people need to fund their 401K’s in December and they put a few bucks into the market.
So the word melt up? It’s used facetiously.