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  • Anatomy of a Stock Market "Meltup"

    As the principal of an investment advisory firm, I have to admit that the stock market sometimes causes us to scratch our heads, wondering what in the world it's up to. As the current market rally continues unabated, this is definitely one of those times. In 2009, the S&P 500 Index soared 65% since its lowest closing value in March and ended the year up over 23%. However, this huge rally seems to have driven stock prices beyond where they should be based on the economic fundamentals.

    Even more confusing is the fact that statistics compiled by the Investment Company Institute (ICI) show that domestic equity mutual funds have had net outflows of money (more withdrawals than new investments) over the past five months, meaning that retail mutual fund investors have been heading for the exits in favor of cash or other asset classes. So, how can it be that the market goes up even though investor sentiment for domestic equities is still decidedly bearish?

    The answer may lie in an obscure market phenomenon known as a 'meltup,' which is a momentum-based rally that usually bears little relation to the underlying market fundamentals. This week, we'll delve into the anatomy of a stock market meltup, discuss possible reasons why stock prices went higher even as retail investors were pulling money out of domestic stock mutual funds and speculate as to whether the meltup might continue in 2010.

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