By Wong Kon How
“A melt-up is a sustained and often unexpected improvement in the investment performance of an asset or 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.” – Investopdia
This is due to the investor herding mentality, hoping the market will resume into its uptrend soon and they do not want to miss-out on this ride again. In recognising a “Melt-up”, identify if the uptrend is being supported by any fundamental shift or it is just a reflection of market psychology on FOMO.
There was a melt-up moment for Netflix before its collapse. How to identify its melt-up moment? Looking across all its significant uptrends, the latest was the steepest. When we study closer into its fundamentals, then its PE ratio was at 600x, today at 215x.
Understandably, most of us will not be able to get out around the top, but there was a clear and present danger at the start of 2022, an immediate reciprocation of the melt-up with a first wave of melt-down, forming an inverted “V” at $500.
Based on the price consolidation between June 2020 to June 2021, most investors have invested at around $500. With the confirmation of the inverted “V”, $500 was an opportunity to cash out. Understandably, it will be a difficult choice for some investors as they will be thinking: “but last month it was at $700”.
Many stock indices are in its melt-up moment. Look around and you can email or message me your case study.