WAS IT JUST A SHORT COVERING RALLY?
16 July 2009 by Cullen Roche
5 Comments
The light volume, poor breadth and quick surge in the market over the last three days has a lot of people calling this nothing more than a short covering rally. I went back and looked at the list of the S&P 500 stocks with the highest short interest to see how they’ve performed over the last three days. The results are pretty good. The average stock on the list has returned 10.5% over the last three days with none of them turning in a negative return. The S&P is up 6% over the same period. The Nasdaq 100 is up 5.&% and the Russell 2000 is up 7% over the same period which would imply that beta has had little to do with the overall return of these names and that this has indeed been a short covering rally.
These days, I just assume any strong move is short-covering. However, this is an excellent bit of insight –thanks!
Volume pattern bullish.
Volume increasing on up days and heavy compared to prevous days on SPX
Dual followthrough days Monday and Wed with wed a confirmed 90% up day.
Your analysis is plain wrong on this one.
TV,
Volume was very light yesterday. Barely a billion shares at the NYSE. The rally off the March lows saw nearly twice as much volume.
My analysis, that short covering has contributed to this rally substantially, is dead right. I don’t know how anyone can call a billion shares at the NYSE a “bullish pattern”. That is just flat out wrong.
You might be confusing my analysis with a bearish market position, in which case I can only assume that you are a new reader because I covered shorts last week and called for a rally on better than expected earnings news this week and have maintained that I believe the rally has legs….
My understanding 90% of equities were up yesterday, which sounds pretty broad to me. That suggests something more than short covering.
One reason that I tend to like financials as a sector is that I believe that you’re going to see a return to valuing them based upon operating income, rather than their balance sheets. The government has effectively created a price floor on the equities and will prevent them from failing, which means that once again, it’s all about fees and spread.
With deposits soaring and the federal funds rate so low, their cost of capital is low, so their spreads are high, which leads to good margins. Once lending expands again, they have plenty of spread to give up that can contribute to market share growth, which will help the top line even more.
I bring up financials because you have GS, JPM, etc. beating expectations, and I think that you’re going to see more of that, which helps drive genuine relief in the market. I personally think that this has limited legs in the short run, but it’s generally a bullish move on the whole. In other words, the bear was cyclical, not secular, and we’re just moving from one cycle to the next. The bear may prove to be ultimately secular, but that may be at price points higher than these, and may settle in once the recovery is underway, not before.
MBA,
I agree with most of what you said, but I don’t believe the 90% up day really proves anything. The fact is that the stocks with highest short interest skewed the returns substantially. They moved nearly double what the market did. There is no data to prove this, but it’s not hard to come to the conclusion that the short sellers in these names were driving the majority of the price action.
I don’t know if you’ve ever been on the wrong end of a short squeeze (I have on more than one occasion), but a few short sellers can drive the overwhelming majority of the price action in their desperation to get out. 90% upside or not matters little. It’s all about the psychology of the investors in the stock and their NEED to get a specific price. My data would imply that short sellers were very desperate to get out of positions yesterday.