Could This Be the Minsky Melt Up?

​Just like the weather in Florida tends to be sunny most days, so the markets have gone up most days recently.  Can you remember a day where you woke up to falling stock futures?  Let me tell you that there have not been many such days in the past six months.
 
How can this be with all the global problems including slowing growth, the Coronavirus, conflict in the Middle East, impeach proceedings here in the U.S. and more?
 
The simple answer is liquidity. 

​Central banks keep printing and that money needs to go somewhere and right now that place is into assets, including stocks and bonds.

We all know this little global experiment in Keynesian Economics is going to end badly, but somehow the Central Banks continue to win the tug-a-war matches with the global economic cycles.
 
This is hard for more experienced managers to fathom as bubbles are everywhere and risk levels continue to rise, but here we are fully invested as if these signs of systematic risk do not exist.
 
I told a client just the other day “I think you have two choices as an investor.  One, take advantage of what the market is giving you and then trade out or hedge when it finally does move into a bear phase; or Two, start taking positions off now and raising cash if you are not confident that someone is watching the store and will reduce exposure for you at the appropriate time.”
 
I also told that same client that “if he does the latter, he may miss out on one heck of a move over the balance of 2020 and into 2021.”
 
How can I make that latter statement?
 
First, the charts are showing that long-term strength in the markets is still possible based on an important historical chart pattern (i.e., real historical precedent).
 
If you look at the chart (below), you will see that the top window, RSI indicator is now above 70 on this monthly chart of the S&P 500 index. 

​The RSI indicator, according to Wikipedia, is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.  In other words, it is a momentum indicator.
 
However, you don't really need to know anything about this indicator to see that when it moves above 70 (as highlighted in yellow), it usually stays there for an average of 15 months, based on 1997 - 2020 historical data.
 
Notice that we crossed the 70 level in February.  We would have crossed last month if not for the end of month Coronavirus swoon. 
 
What happens when the RSI indicator is above 70?
 
Usually the largest and most steep part of the stock market move occurs or as we call it the "melt up."  This is the point that the most money is made in the market's move.
 
If we look at the past 6 times the market has risen above this level and stayed above 70 for more than 3 months, we find the following moves are possible:

​When this occurs, historically the market has added 24.0% on average in return for the 15 months (on average) it stayed above 70 on the RSI.
 
Based on this alone, I think the stock markets could be headed higher, possibly much higher.  History would say we could look for a price target in the range of 4090 for the S&P 500 come 2021.
 
​Additionally, we believe the markets have further to go based simply for physiological reasons.
 
No bull market ends without excess enthusiasm for stocks!
 
In my experience, this is still one of the most hated bull markets that I have participated in to date.
 
In fact, I have almost daily discussions with long-time market participants who are raising cash, getting out or concerned about the markets.  Does that sound like euphoria?
 
Now obviously, no one knows for sure what might happen, but I think there is a pretty good chance we could see an average move of 15 months and 24%.  If it "melts up" all the better for our clients and investors.
 
That melt up may be the "Minsky Melt Up" we have been predicting.  Hyman Minsky warned that capitalist economies created debts.  Crises are born out of debt financed speculation on asset prices (private equity, levered loans, etc.)  He theorized that eventually asset prices pop and then prices collapse. Conflicted governments then devalue, re-lever and set things up for the next fall.  Sounds like the environment we are in today doesn’t it?
 
Could it be that this next move for the markets is a melt up to end all melt ups?  Could it be that this move is the final move in this cycle?  

Again, no one knows for sure, but this bubble must pop sometime! 
 
When you pop a balloon what does it do?  It shoots higher and then just as quickly runs out of gas and drops.
 
Sound scary? Well yes it could be.  However, also it could be the greatest opportunity to profit with eyes wide open, constantly looking for the right opportunity to exit stage left, that we may see in our lifetimes!

Important Disclosures:

Past performance is not an indication of future performance and there can be no assurance that the above indexes will achieve results in line with historical results.  This blog post is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

The S&P 500 Index is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy.  It represents a broad cross-section of the U.S. equity market, including stocks traded on the NYSE, Amex and NASDAQ.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the United States.