Meltups and running stock markets refer to euphoric periods when equity prices rise rapidly and continuously without corrections. It’s a time when stocks can rise on negative news and technical indicators can remain overbought for an extended duration with less volatility. Classic longer term examples of this during our record decade plus Bull market occurred in 2009, 2013 and 2017 when stocks appreciated to overly exuberant levels for over a year without a notable correction. The run higher over the past 3 months has also been relentless, sending our own preferred metrics to extremes we normally would label a Sell. So far we have consistently resisted shifting from our Bullish near term and long term outlook and have stated that we did not expect a short term top until at least mid January when the China Trade Deal is signed and not until the SP had moved into the 3280’s. Investors can remain long term Bullish, while the risk of a normal correction greater than 5% will rise after the January 15th and the 24th inflection dates pass.
With the SP 500 Index testing the 3290’s, sentiment near record overbought extremes and a momentous Trade Deal signing on January 15th, it confirms that our ideal 3 month old forecast is being achieved this week and some caution into early February is warranted. Trump’s masterful manipulation of market expectations stimulating a steady flow of buying the rumors of a China trade deal, has kept downside risk at bay since October. Buy the Rumor has worked well for investors and soon we may see if there is a Sell the News aspect to the old adage as the details of the trade deal surface and the earnings season kicks in this week. Should the SP surge past 3300 after the 15th we could see a minor overshoot in values to SP 3320 to 3340 and Dow 29,400 to 29,600.
While the signs of a notable short term top should manifest in January, we find one area of China related euphoria in Agriculture (Ag) buying to be missing. We take the US trade negotiators at their word that China has enforceable guarantees to buy $50 Billion worth of raw and finished Ag products, mainly centered around Soybeans. It’s been surprising that Ag commodity skepticism remains high with no anticipatory speculation purchases to date. Perhaps it’s a warning of a negative surprise in the short term, however, “if” the Dollar breaks support at 96 and Soybeans and Hogs move to new 2020 highs, then there could be a renewed equity market buying binge on signs of improving US and Chinese trade. While stocks are due for some corrective action by the end of January, a transition to a lower Dollar and stronger commodities trend will signal further confirmation that a cyclical global economic rebound has begun with new buying in stock indices led by Emerging markets.