Monday, December 5, 2011

What is a Stock Market "Melt-Up"?

Photo by Marcus Revertegat

What is a stock market "melt-up?" Like the term implies, a melt up is the opposite of a "melt-down." In a melt-down, stocks fall significantly in a short period of time. In a melt-up, stocks rise significantly in a short period of time.

A recent melt-up occurred on Tuesday, Oct 4, 2011. In the last hour, the market rose almost 400 points, or about 4%, in frenetic, high volume trading - for no apparent reason.

The recent melt-up is significant because it is reminiscent of the flash crash which occurred on May 6, 2010. During the flash crash, the Dow dropped 1,000 points and then recovered within the span of half an hour. (The Dow Jones Industrial Average, DJIA, is comprised of thirty stocks that are major factors in their industries and widely held by individuals and institutional investors.)

It would seem that with rapid fire computer trading and the underlying level of market volatility, we should expect such market events to continue for the foreseeable future.

(The DJIA is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.)