Folks, I want to address something as we look at the market so far at the beginning this year.
You may be asking yourself whether you should be weary of the continuous run-up in stock prices. After all, bull markets can't last forever -- and this one is the second-longest on record.
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On the other hand, you may be experiencing FOMO -- that is, fear of missing out. And that may be leading to you questioning whether you should be actively putting new money to work right now.
And while I don't know your specific situation, generally speaking, my answer to both questions would be "yes" -- you should be weary, but you should probably be putting money to work in this market anyway.
Welcome to the "melt-up" phase of the market.
You may have heard this phrase getting bounced around recently in the financial press.
Investopedia defines the term thusly:
"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 created by a melt-up are considered an unreliable indication of the direction the market is ultimately headed, and melt ups often precede melt-downs."
Get ready to hear it more often.
That's because this is what we typically see during the late stages of great bull markets. We saw the Dow Jones Industrial Average cross the 25,000 threshold on January 3, only to see it surge another 700-plus points since then. And as I write this, the S&P 500 has already advanced by 3% since the start of the new year.
But this melt-up may be just getting started. (Economists and students of the market also sometimes refer to this as the "euphoria" stage.)
This shouldn't scare you. In fact, some of the best gains to be had during bull markets are found during this stage. One need only think back to the tech bubble to remember this -- some of the largest gains were made in the last year before it was all over.
A Value Investing Legend (And Assett Bubble Expert) Weighs In
Legendary value investor Jeremy Grantham, co-founder of GMO Capital, summed up the situation nicely in a letter to investors on January 3:
"I find myself in an interesting position for an investor from the value school. I recognize on one hand that this is one of the highest-priced markets in U.S. history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. The data on the high price of the market is clean and factual. We can be as certain as we ever get in stock market analysis that the current price is exceptionally high."
He continued by pointing out that Ben Graham, the father of value investing, noted that no bubble can break without "signs of real excess." He also noted Nobel Prize-winning economist Robert Shiller's perspective that "not nearly enough signs of euphoria were yet present to make this look like a late-stage bubble." (Shiller's perspective, as he points out, is important here. He was one of only a handful who predicted the market's collapse in 1999 and in 2006.)
Based on this, along with a statistical study of previous U.S. equity bubbles, Grantham extrapolated exactly what it would take to make it look like the S&P 500 was in a late-stage bubble.
"A range of 9 to 18 months from today and a price rise to around 3,400 to 3,700 on the S&P 500 would show the same 60% gain over 21 months as the least of the other classic bubble events."
If this is indeed close to the truth, then it suggests we may have a lot more gains ahead of us. That should be encouraging. And while Grantham further says that while no two bubbles are the same, there does tend to be a concentration in the outperformance of "quality" stocks in a rapidly-rising market at the end of these cycles.
Part of the reason, he says, is it doesn't particularly pay to bet against the market in these situations. So you're kind of forced to "dance" to the tune of it -- and you do it by betting on quality.
Look For These Anecdotal Warnings Signs
Finally, Grantham gives a few other tips on how to know whether we're truly at the end of a bubble in the market...
"Anyone around in 1999 and early 2000 has had a classic primer in these signs. We know we're not there yet, but we can perhaps see some early movement: increasing vindictiveness to the bears for costing investors money; the crazy Bitcoins of the world ... and Amazon and the other handful of current heroes -- here and globally -- taking over more of the press coverage and a growing percentage of total market gains... The increasingly optimistic tone of press and TV coverage is also important. A mere six months ago, new market highs were hardly mentioned and learned bears were featured everywhere. Now, the newspaper and TV coverage is considerably more interested in market events."
"Other items worth mentioning are IPO windows and new record highs for corporate deals. We can have a satisfactory melt-up without them, but still one or the other is likely and both together are quite possible. I believe their presence would make a spectacular bust that much more likely.
Finally, my favorite advice once again: Keep an eye on what the TVs at lunchtime eateries are showing. When most have talking heads yammering about Amazon, Tencent, and Bitcoin and not Patriot replays -- just as late 1999 featured the latest in Pets.com -- we are probably down to the last few months. Good luck. We'll all need some."
Get In, Get Out: A Better Way To Maximize Returns
I bring all of this up because my colleague Jared Levy basically echoed these sentiments to his Profit Amplifier subscribers.
In his most recent issue, Jared noted that a huge driver of this melt-up that no one is addressing is the Amazons and Facebooks of the world dragging what he called the "less worthy" along for the ride.
These less-worthy stocks, as he noted, simply don't merit the valuations they're being given. But yet they still climb because these names are included in large index funds and ETFs, which account for a full third of all the market's volume.
"Even though these investment vehicles offer a plethora of positives for investors, there's also a downside to their rising prominence.
I call it 'first-class cargo.' That's the idea that not-so-great stocks that are part of a popular ETF, index or mutual fund will get a free ride if others in that group are performing well.
You see, any time purchase a slice of an ETF, index, mutual fund or other grouped product, the managers of that product must go and purchase shares in each of the respective companies within that group.
For example, if you buy 100 shares of the Nasdaq 100 ETF (NYSE: QQQ), you're theoretically buying 11.9 shares of Apple (NASDAQ: AAPL)... 7.7 shares of Facebook (NASDAQ: FB)... 1.8 shares of Amgen (NASDAQ: AMGN)... 2.6 shares of Comcast (NASDAQ: CMCSA)... and even smaller amounts of about 95 different companies.
Unless there's major news about an individual company, its movement will largely be dictated by the ebb and flow of the indexed product it belongs to. In other words, if the Nasdaq 100 is rising (maybe because of Apple and a few other companies), Amgen is likely moving higher as well."
Because of this first-class cargo effect, Jared says he's going to be lengthening the expiration dates on his trades and focusing on companies that he thinks have value with growth potential as opposed to momentum. He's also forgoing short-side trades, at least for the time being.
On that note, Jared just kicked off the new year with not one, not two, but three fresh trades that meet his new focus. All are in quality names that are riding higher and have a good chance of delivering far higher gains than normal investors will make, thanks to his market "raiding" strategy.
You see, while the rest of the crowd is simply buying stocks and hoping for the best, Jared's Profit Amplifier subscribers have spent years "raiding" the market with simple options trades, taking more than their fair share of gains. I'm talking about returns of 35% in six days, 29% in four days, 31% in 10 days and 27% in seven days, just to name a few.
Bottom line, his stock market raiding technique is the best way to increase your returns while preserving capital and reducing risk. Of course, that's only if it's done correctly.
That's why he's created a special report that will walk you through the steps he takes to pocket outsized gains in a fraction of the time. If you'd like learn more about how it works -- and get your hands on his latest trades -- simply follow this link.
This article originally appeared on StreetAuthority.