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Why the stock-market rally may be entering the anxiety-driven stage

Fear of missing out might be running strong this time of year.

The stock market on Tuesday ended the dreaded month of October not only unscathed but at or near record highs, which means the biggest risk for money managers might just be the threat of missing out on the 2017 rally.

For institutional investors, “missing the upside…could anger boards and trustees,” wrote Charles Dumas, chief economist at Lombard Street Research, in a note titled, “S&P 3,000?—a big upside for the big ‘risk.’”

“On my two-week trip through Korea, China, and the U.S. West and East Coasts, I found little resistance to the notion that the chief risk in today’s markets is missing what remains of the cyclical upside,” he said.

He argued that underlying global fundamentals remain strong, with the world economy being pulled by three locomotives—the U.S., Europe and China—for the first time this century.

Second, plenty of commentators remain defensive, with reasons for a potential selloff “still commonly advanced,” which indicates that buying power on the sidelines remain. Finally, central banks’ desire to push stubbornly low inflation rates to 2% mean they’re unlikely to be as hawkish as investors expect, despite the fear that overly loose policy for too long could create a bubble.

“It all suggests the era of too much [monetary stimulus] too late is not yet past,” he said. “So the big risk is a new bubble, not a near-term bear market. And then there are U.S. tax cuts to consider,” he wrote.

The S&P 500 SPX, +0.09% posted a 2.2% monthly rise in October, while the Dow Jones Industrial Average DJIA, +0.12% rose 4.3%. The Nasdaq Composite COMP, +0.43% saw a 3.6% monthly gain, ending Tuesday at a record close.

See: The stock market’s tech benchmark just matched a nearly 40-year-old record

The October performance comes as stocks end what’s informally considered the “worst six months” for the Dow and the S&P 500, according to Stock Trader’s Almanac (for the Nasdaq, the period between the end of June and end of October is considered the worst four months of the year).

Instead, the S&P 500 and Dow have logged seven straight months of gains, the longest streak for the Dow since April 2012 and since May 2013 for the S&P. The Nasdaq has logged four consecutive monthly rises.

Indeed, some stock market watchers have declared that what has long been described as the most hated bull market in history has undergone an important shift, decidedly moving from skepticism to optimism. (Investors often use investing legend John Templeton’s maxim that bull markets “are born on pessimism, grown on skepticism, mature on optimism and die on euphoria” for reference points.)

Some have argued that the stock market might even be on the cusp, or even in the early throes, of a “melt up” that could drive gains significantly higher in coming months as investors stampede into equities on fears of being left behind. Melt-up talk seemed to gather speed last week as the Nasdaq tore higher in the wake of strong earnings from a host of tech giants.

That doesn’t mean throwing caution to the wind. Jeffrey Saut, chief investment strategist at Raymond James, argued that the market appears to be in its “upside ‘blow off’ stage.” The secular bull market that the firm has embraced since October 2008 remains intact, with stocks in the “second leg” of the bull run that started in February 2016, he said, with “years left to run.”

“Yet our models continue to suggest a cautious stance is warranted,” he said, in a Tuesday research note.

Kristina Hooper, global market strategist at Invesco, also offered a note of caution, citing a rise in the Investors Intelligence Survey that saw bullishness register above the critical 60 level for three consecutive weeks. A high bullishness reading is viewed as a contrarian signal.

“As with every indicator, it is not foolproof, but it does suggest more caution and discernment in choosing investments. It is a reminder that, while investors with longer time horizons typically need capital appreciation, they need to keep in mind the importance of downside protection,” she wrote in a blog post.

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