By now, you’re probably familiar with the concept of the “Melt Up”…
It’s our colleague and True Wealth editor Steve Sjuggerud’s term for the final furious push higher in the last stages of a bull market. And it’s exactly what is happening today…
Investors are flocking to the market. Optimism is reaching irrational levels. And according to Steve, these factors will help push stocks much higher in the coming weeks and months.
But that doesn’t mean they’ll go up in a straight line. Even as the market climbs to seemingly impossible heights, the Melt Up can still put your emotions to the test…
In today’s article, Steve details the five pullbacks we saw during the last Melt Up… why you should expect more corrections in the months ahead… and how to prepare for when your stocks are falling…
Table of Contents
The Climb to the ‘Melt Up’ Peak Will Be a Bumpy Ride
I’m starting to feel like a broken record…
I have been talking about the Melt Up for years. I first gave a speech on the topic at our annual Stansberry Conference and Alliance Meeting way back in 2015.
It hadn’t started back then, of course… But I saw the underlying pieces moving into place.
In my mind, an eventual Melt Up was a certainty. And as regular Digest readers know, I’ve done everything possible to tell the world about it since then…
There have been plenty of starts and stops of Melt Up behavior in recent years. And for the most part, stocks were on a one-way cruise higher as we headed into 2020.
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It even looked like the final swing of the Melt Up was upon us at the start of that year. But then COVID-19 crashed the party…
Make no mistake, that bust was painful and record-breaking. However, the recovery since then has been just as impressive…
It has brought retail investors into the market in a major way. One survey told us that an incredible 28% of Americans bought GameStop or other “joke stocks” earlier this year. It’s hard to believe. But it’s a sure sign that the Melt Up is back… and that the clock is ticking on these good times.
It’s true that big gains are likely as euphoria pushes the market higher. And as I said yesterday, you want to ride the wave for as long as you can. But I want to be very clear about what you should expect when investing in today’s environment…
You see, investing during a Melt Up takes a ton of guts. It’s often a bumpier road than the headline gains imply.
There will be times when the market puts your emotions to the test…
For example, the late-1990s Melt Up wasn’t a one-way trip higher. Instead, it’s proof that 10% corrections – like the one we saw last September – are common during Melt Ups.
We saw five pullbacks of roughly 10% in the Nasdaq during the final 18 months of that boom. The largest one led to a 13% decline before bouncing back. Take a look…
Thanks to hindsight, we know these corrections were just that… short-term falls before the next leg higher. So it’s easy to brush them off as irrelevant today.
But I can assure you… It didn’t feel like that in real time.
In the thick of corrections like that, doubt can start to set in… You can begin to question if the current correction is actually the next major bear market.
Maybe you had those thoughts last September as the Nasdaq sold off. It’s totally normal, especially after the incredible bust we experienced at the start of 2020. But you’ve got to be OK with that kind of thing to really benefit from what’s going on today.
I expect we’ll see more corrections in the months ahead. But this is the reality of a Melt Up… It isn’t all smooth sailing for investors.
There is triple-digit upside potential as the mania unfolds… But it doesn’t come without increased volatility.
Knowing that corrections are common will help you navigate the Melt Up. You’ll know ’em when you see ’em… And you’ll be less likely to jump ship during a correction and miss out on big gains.
Having a stock crash on you is part of investing in stocks… It’s a risk you take every day that you’re invested in the market.
And to help prepare yourself for when stocks are falling, it’s important to make a plan. So here’s what you need to do…
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What To Do when The Stock You Own Is Crashing?
When a stock you own is crashing, you need to ask yourself two things…
- Is the reason I bought it still valid?
If you bought a tiny biotech stock because you thought its drug was going to succeed, but it failed, you need to get out… Don’t say, “Well, the company has other things cooking, too” or “Well, I’ve lost SO MUCH already, how much worse can it get?”
Don’t catch yourself saying either of those things. If the reason you bought the stock is no longer valid, get out.
- What is my “point of maximum pain”?
How much are you willing to lose before crying “uncle”?
You should try to define this point when you enter the trade. That way, you’ve made a rational decision to sell in advance, not an emotional decision right at the moment the stock is down.
Let’s say I’m down on a trade in the VanEck Vectors Russia Fund (RSX). I’m looking at it through the lens of these two questions…
In this example, the basic reason I bought is that Russian stocks are “stupid cheap.” So if things go from “bad to less bad” in Russia, I can make A LOT of money.
Maybe Russian stocks are still cheap. But what about No. 2 above – what is my point of maximum pain here?
In my True Wealth newsletter I advise my subscribers to utilize “trailing stops” to protect their investments. So if I set a trailing stop of 25% on this trade, that is my point of maximum pain.
If my investment in the Russia fund closes 25% below its highest price since I bought, I would sell the next day – no ifs, ands, or buts.
And of course, the most important thing here is… I have a plan. I’m not holding and hoping. I’m not panicking and selling.
I have an exit strategy.
So with that in mind, let me ask you… What do you do when your stock is crashing? Do you…
- Hold and hope?
- Panic and sell?
- Have an exit strategy?
Which sounds the smartest to you?
Make sure you have an exit strategy in place today… Someday, possibly much sooner than you think, you will be glad you do – guaranteed.
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Editor’s note: With a plan in place, you’ll sleep much better during any corrections as the Melt Up reaches its final innings. But Steve says there’s something else you can do to maximize your upside potential…
In short, according to Steve, the COVID-19 pandemic fundamentally changed the Melt Up. And last Thursday night, he hosted a special event – joined by two surprise guests – to explain exactly what you need to do to prepare.
For a short time only, you can watch a free replay of Steve’s event to learn exactly what to do… including how to potentially make bigger gains in a few months than any other time over the past decade.