At this point, I’m not really sure what counts as a “blowoff” top.
That term has been bandied about recently, and there are plenty of folks who will tell you they can define it, but that’s silly. It’s a Trump-ish superlative like “tremendous,” or “phenomenal,” or “big league.” Same goes for “melt-up.” What the hell is a “melt-up,” exactly, if not what we’ve been seeing every single day for years? I don’t know. And contrary to what they’ll tell you, neither does anyone else.
“Later stages of bull markets are dominated by sentiment rather than valuations,” Bloomberg’s Tanvir Sandhu wrote earlier this morning. Duly noted, but please point me to a time over the last year when it would have been plausible to say that valuations at the index level were some semblance of compelling, because I must have been off the desk that day.
Anyway, the consensus seems to be that we’re entering some kind of “final phase” of the rally and it’s going to be a “tremendous,” “phenomenal”, “melting-up,” “bigly,” blow-off” top.
And do you want to see something super funny? Look at this Google Trends chart for the search term “what is a melt up?”
Yeah. “What is a melt up?” I’m willing to bet that exactly none of the people asking Google that question will come away with a satisfactorily definitive answer.
“Traders are positioning to chase equities into year-end for a possible rally that the popular press has termed as a ‘melt-up’ or ‘blowoff’ scenario [as] the equity market rally from the 2009 bottom has been the second longest, right after the one preceding the Dot-com crash, but the SPX keeps marching higher ignoring events that would have historically challenged the advance,” Deutsche Bank writes, in a new note, adding that “with valuations at record highs, and many risks still present ranging from geopolitical issues, failure on getting significant tax reforms done, re-emergence of debt ceiling discussions, etc., upside options provide a good way to retain long exposure while protected against downside risks.”
And here’s Goldman on “unusually bullish” positioning going into earnings season:
Index and single stock options pricing shows that investors have positioned for nearterm asymmetric upside. In the context of the acceleration in the equity rally over the past two months, we believe this options positioning is evidence of a crowded equity market and see it as a negative sign for stocks over the next month. Following similar positioning over the past five years, returns were -1.9% below average in the subsequent month.
Obviously, people are just trying to figure out how to participate in this highly anticipated “blowoff” without incurring the risk of “blowing up” that comes with holding the actual shares.
Meanwhile, the above-mentioned Tanvir Sandhu notes something disturbing. Namely that the programmatic crowd is busy trying to determine just how much of a systemic risk they pose in the event this all goes to hell in a handbasket. To wit:
Market structure poses risk, with systemic selling of vol tails in this bull cycle, with quants calculating what fraction of shares will have to be sold when vol goes up to decrease exposure and whether that’s comparable to 1987 portfolio insurance crash.