The latest inflation data shows the Fed's preferred price gauge cooling, virtually assuring interest rate cuts are coming in September. But could these rate cuts provide the accelerant to ignite a rare "melt up" frenzy in tech stocks?
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A melt up refers to a market environment where valuations become completely disconnected from reality, driven by psychological forces like fear of missing out (FOMO) and greed. Asset prices experience powerful, near-vertical ascents over a short period as fundamentals go out the window.
We're not talking about a standard sector uptrend, but outright market mania. Prior melt ups like the late 1990s tech stock bubble showed how quickly triple-digit or quadruple-digit percentage gains could accumulate in just 12-24 months before the fever broke.
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For tech investors, the combination of Fed rate cuts increasing market liquidity and relatively high earnings growth could provide the ideal melt up formula.
Cheaper borrowing costs allow corporations to double down on share buybacks, mergers, and growth initiatives. At the same time, excess cash on the sidelines gets funneled into the strongest growth stories as FOMO takes hold.
While still early, some familiar melt up signals are already emerging:
- Individual tech highflyers exhibiting melt up trading patterns
- Record cash levels awaiting deployment into the next frenzy
- Speculative euphoria building around AI and other disruptive tech themes
If the stars align for a full-blown melt up taking hold, prudent profit-taking will be critical for tech investors to capitalize on any irrational exuberance before reality reasserts itself.
IF YOU THINK A MELT UP IS BEGINNING TO HAPPEN, YOU NEED TO WATCH THIS NEXT
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