What is a stock market “melt-up”?
The past rhymes…
But how can you tell when markets might be entering this final phase before a crash? Grantham thinks you should watch out for the following factors;
· Price acceleration
· Increasing concentration of buying
· Outperformance from quality stocks
· Extreme expensiveness
· Evidence of frothiness
Let’s take each of these in turn.
A focus on winners
Evidence of froth
This is perhaps the most subjective of his tests. What we are looking for here is evidence that markets and investors have got well ahead of themselves and are ignoring classic risk signs. Some of the red flags include;
· Record levels of M&A and IPO activity
· Very high confidence levels
· Investor exuberance evidenced in sentiment surveys
· A willingness to buy anything (Bitcoin?)