DEFINITION of 'Melt Up'

A melt up is a dramatic and unexpected improvement in the investment performance of an asset class, driven partly by a stampede of investors who don't want to miss out on its rise, rather than by fundamental improvements in the economy. Gains that a melt up creates are considered to be unreliable indications of the direction the market is ultimately headed. Melt ups often precede melt downs.

BREAKING DOWN 'Melt Up'

Financial analysts saw the run-up in the stock market in early 2010 as a possible melt up, because unemployment rates continued to be high, both residential and commercial real estate values continued to suffer, and retail investors continued to take money out of stocks.

These are all forms of economic indicators, which investors follow to forecast the direction of the stock market and overall health of the U.S. economy.

Melt Up and Nuances of Economic Indicators

Ignoring melt ups and melt downs and instead focusing on fundamental factors begins with an understanding of economic indicators. Economic indicators come in the forms of leading indicators and lagging indicators.

Leading indicators are factors that will shift before the economy starts to follow a particular pattern. For example, the Consumer Confidence Index (CCI) is a leading indicator that reflects consumer perceptions and attitudes. Are they spending freely? Do they feel like they have less cash to work with? A rise or fall of this index is a strong indication of the future level of consumer spending, which accounts for 70% of the economy. Additional leading indicators include the Durable Goods Report (DGR), developed from a monthly survey of heavy manufacturers, and the Purchasing Managers Index (PMI), another survey-based indicator that economists watch to predict gross domestic product (GDP) growth.

Lagging indicators shift only after the economy has begun to follow a particular pattern. These are often technical indicators that trail the price movements of their underlying assets. Certain examples of lagging indicators are a moving average crossover and a series of bond defaults.

Melt Ups and Fundamental Investing

Many investors attempt to avoid melt ups and their impact on investor emotions when placing bets by instead focusing on the fundamentals of companies. Warren Buffet, for example, is a famous value investor, who made his fortune by careful attention to companies’ financial statements, even amid economic turmoil. He focused on corporate value and price: was the company on solid financial footing? How experienced and reliable was the management? And was it over- or under-priced? These questions often help investors focus on intrinsic value over hype.

RELATED TERMS
  1. Leading Indicator

    A leading indicator is a measurable economic factor that can ...
  2. Bullion Coins

    Bullion coins are precious metal coins that are generally bought ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Composite Index Of Lagging Indicators

    The Composite Index of Lagging Indicators is an index published ...
  5. Sentiment Indicator

    Sentiment indicator refers to a graphical or numerical indicator ...
  6. Market Indicators

    Market indicators are a subset of technical indicators used to ...
Related Articles
  1. Trading

    Trading Around Key Options Indicators

    Learn the key economic indicators to help predict market movement.
  2. Investing

    Why Are People Hoarding Coins?

    Meet the new class of investor: the coin hoarder.
  3. Investing

    Introduction To Fundamentally Weighted Index Investing

    If you believe the market smiles on those who focus on value, growth or income, this vehicle may be for you.
  4. Investing

    Chipotle Shares Still Melting, More Downside Risk

    Chipotle shares have been hammered recently and will likely continue to plunge in the near-term.
  5. Investing

    How Profits Will Be Made As The Globe Heats Up (MON, RDS-A)

    Climate change will harm earth and its inhabitants in various ways, but certain industries will see increased profits as a result.
  6. Investing

    Consumer Confidence: A Killer Statistic

    The consumer confidence is key to any market economy, so investors need to learn how to analyze them.
  7. Investing

    What Are A Stock's "Fundamentals"?

    The investing world loves to talk about fundamentals, but do you know what it means?
RELATED FAQS
  1. What are leading, lagging and coincident indicators?

    Leading indicators move ahead of the economic cycle, coincident indicators move with the economy, and lagging indicators ... Read Answer >>
  2. What are the most common market indicators to follow the U.S stock market and economy?

    Understand some of the key indicators analysts use to follow the U.S. stock markets and to assess the overall condition of ... Read Answer >>
  3. How do I start using technical analysis?

    Technical analysis is a method of analyzing securities by evaluating current and historical price and/or volume activity. ... Read Answer >>
  4. What is a common strategy traders implement when using the Money Flow indicator?

    Learn a common trading strategy traders implement with the money flow indicator to identify profitable trade entry and exit ... Read Answer >>
  5. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
Trading Center