The Trump market 'melt up': Euphoria now, but January hangover may be looming

The Trump rally has been so powerful it's starting to "melt up."

The blue-chip Dow Jones industrial average has closed higher in 17 of the 21 sessions since Donald Trump was elected president, with about a dozen record closes so far as it continues marching higher. It burst past the 19,000 mark for the first time and is now approaching 20,000.

And like a tropical storm gathering strength, the Dow just Wednesday had its largest point gain (up 297.84, to be exact) since the Nov. 8 election.

It was, in fact, another Dow that had investors especially excited Wednesday: the Dow Transports. This index, whose history stretches back more than a century, had been a terrible performer since peaking nearly two years ago.

Wednesday, the Dow Transports finally joined the record-high club. That club now includes both the Dow Transports and Industrials (which itself is significant to market watchers), the broad market S&P 500, and the small-cap Russell 2000.

The Nasdaq, laden by technology and beaten-down pharmaceutical stocks, has still notched fresh highs itself since the election and closed Wednesday less than a dozen points shy of its high-water mark.

Bull market?

Euphoria? Not yet.

Professional investors appear simultaneously excited and wary of a severe January hangover. Many have also seen any gains in their stock portfolios offset by losses in their bond holdings.

As for the general public, the kind of frenzy that marked the late 1990s dotcom bubble in the stock market has yet to appear.

There are signs the record rally is starting to pierce the public consciousness, however.

Anecdotally: "Bull market" showed up in my coffee shop the other morning.

The question of the day on the tip jar (as pictured): "In a bull market, prices are expected to (A) fall, (B) rise."

Tip jar at Birch Coffee, NYC, on Dec. 4.
Kelly Evans | CNBC
Tip jar at Birch Coffee, NYC, on Dec. 4.

There were plenty of cash tips in the "fall" jar, but I suspect that was just customers keeping things interesting (or ignoring the trivia questions altogether).

Sentiment, whether drawn from surveys, coffee shops, or Uber drivers, is one way to gauge the staying power of a rally like this.

Taking Credit

Brian Reynolds, chief market strategist at New Albion Partners, has some other gauges.

In fact, Reynolds canceled his vacation this week to alert clients to the powerful bullish developments he saw forming.

It's a bit wonky, but indexes representing credit-derivative spreads, which represent a type of hedge or insurance investors pay for their investment- grade corporate-bond exposure, have plunged to near-cycle lows.

Meanwhile, the spread between riskier "junk" corporate bonds and "risk-free" U.S. Treasurys has dropped since the election even though interest rates generally are rising. That means investors are less concerned about losing their money on lower-quality corporate debt.

Strong credit markets give companies borrowing options to boost their stock prices, while making bearish investors scramble to close out trades before losing any more money, both of which then push the stock market even higher and continue the self-reinforcing bullish cycle.

"If stocks can hold [this] breakout for a couple of weeks or so, they often go on a multi-month long run fueled by the trifecta of buybacks, forced short-covering, and catch-up buying," Reynolds wrote Tuesday.

Of course, "If investors fight back and drive prices below the breakout area, then stocks often have to regroup for a month or two, sometimes with another panicky drop," he added.

Indeed, we've had many of those panicky sell-offs during this nearly eight-year bull market since the March 2009 financial-crisis bottom.

Another one after this Trump run would practically be welcomed by investors as a healthy correction. After all, the bigger the market "melt up," the bigger the typical meltdown.