Welcome to the Next Chapter of the 'Melt Up'

Editor's note: The bull market may be eight years old, but it shows no signs of slowing down anytime soon.

Today's Masters Series originally appeared in the June 28 and June 29 editions of our free DailyWealth e-letter. In it, Steve Sjuggerud explains how he knew the "Melt Up" was inevitable... and why stocks can still soar dramatically from here...

Welcome to the Next Chapter of the 'Melt Up'
By Steve Sjuggerud, editor, True Wealth

It was nearly two years ago... September 2015.

Stocks had just finished their first 10%-plus correction in years. But I was bullish.

I was preparing to give a speech at the Stansberry Alliance conference. It was titled "Welcome to the Melt Up."

I was worried as I got up on stage. I didn't know how the crowd would react.

I was about to give a speech that was against what everyone in the room believed.

They were all bearish – the speakers, the attendees, you name it. The stock market had fallen in August, and then again in September. These stock market declines had driven investors to an extreme in fear.

"Welcome to the Melt Up" was the opposite of what they wanted to hear. But it turned out to be exactly right...

Stocks have soared over the last two years... They've hit new high after new high.

Hindsight makes those gains seem obvious now. But calling for the "Melt Up" was a massively contrarian opinion in late 2015.

I was confident because I'd seen a Melt Up before...

The most recent major example was the top of the 1990s bull market. The Nasdaq Composite Index soared more than 86% in 1999 alone. Now that was a clear Melt Up period.

Importantly, these huge Melt Up gains typically begin after a time of extreme fear.

In late 1998, stocks had fallen dramatically in the wake of the Asian Financial Crisis, and we hit a fear extreme. Then, stocks surprised everyone and soared higher – the Nasdaq rose 200% in 18 months.

Take a look...



That's what a Melt Up looks like... a massive, blow-off top at the end of a bull market.

The important thing to remember is that Melt Ups usually begin after a period of extreme fear. And that's exactly what we had in late 2015 and early 2016...

Stocks fell in autumn 2015 and at the beginning of 2016. In both cases, the short-term downside was 10%-plus. And those were the first 10%-plus declines in stocks since 2011.

Investors had gotten used to consistent gains and easy money. But these declines showed a crack in the armor, and that caused a major spike in fear.

One simple way to size up fear in the markets is through the Volatility Index (the "VIX") – often referred to as the market's "fear gauge."

The VIX spiked during both of these falls. Generally, a VIX reading above 20 shows fear in the market. And in autumn 2015, the VIX rose above 40 – a level not seen since 2011. The VIX nearly hit 30 again in early 2016. Take a look...

This set the stage for what has happened since. It set the stage for the Melt Up...

We were late in the bull market... And stocks fell slightly, causing a major fear extreme.

The S&P 500 is up around 35% since its 2016 bottom. That's the Melt Up in action. But I don't believe it's over yet.

The reason is simple... Things don't look anything like they did at the top of the last Melt Up.

During the last Melt Up, we saw the biggest gains in the tech-heavy Nasdaq Composite Index. It soared 200%-plus in 18 months as the Melt Up concluded. And prices hit truly ridiculous valuations along the way.

A lot of people point to today's valuations in the U.S. as a reason the recent gains can't continue. But here's the thing...

During the last Melt Up, valuations were already ridiculously high – before it all began.

The chart below shows the price-to-sales ("P/S") ratio for the Nasdaq during the 1990s. (This ratio is one of the best ways to measure real value in the stock market.) Take a look...

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The Nasdaq's P/S ratio doubled from 1.5 to 3 in 1998-1999. It then roughly doubled again before finally hitting its peak.

This proves a powerful point... Valuations alone don't stop this kind of boom.

And that was just the broad index. The Nasdaq's top holdings hit even crazier levels...

The table below shows the Nasdaq's top 10 holdings at the end of 1999. Many of these are household names today. But back then, they were the most exciting and highest-growth businesses in America.

Importantly, as the table shows, these companies saw their P/S ratios explode during the last Melt Up. Take a look...

These numbers are hard to believe, but they're true...

Microsoft was priced at a ridiculous 17 times sales when the Melt Up began. Its valuation increased nearly 60% from there. Qualcomm went from being dirt-cheap at 1.3 times sales to a true bubble valuation of 27 times sales.

Only one stock on this list – WorldCom – saw its P/S ratio decline during the Melt Up.

Most of them saw their P/S ratios increase by multiple times – and they eventually reached crazy levels.

This is all the proof I need that the Melt Up in the U.S. isn't over yet.

Valuations are high... But they're nothing like the last Melt Up. And that tells me stocks can still soar dramatically from here.

Good investing,

Steve Sjuggerud

Editor's note: Steve believes stocks are headed much, much higher during the Melt Up phase of the bull market. In fact, he believes the Dow could soar past 50,000 before everything is said and done. He recently explained all of the moves investors need to make – and when – to capitalize on the Melt Up. Watch his short video presentation here.