By any measure, the parabolic stock market rally off the February low has been stunning to behold.
Market Roundup
Every stock index and sector has participated to one degree or another: small caps, large caps, growth, value, you name it. It has been a complete melt-up for stocks with the Dow Jones Industrials gaining 2,593 points — a vertical ascent of 16.7% — in just the last 10 weeks.
And what do we have to thank for this miraculous reversal of fortune?
Better economic data? Well, it has improved somewhat, but GDP growth estimates are still dismal at just 0.3% this quarter.
No, we have skeptical bears to thank for the magnitude of this rally according to Bloomberg; particularly the short-sellers!
Bearish bets on stocks recently reached the highest level since the 2008 financial crisis, with short interest rising virtually in lock-step with the S&P 500 Index as you can see in the graph below.
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| High bearish bets on stocks |
The Very Big Short
Even as U.S. stocks rebounded by some $2 trillion in value over the past six months, skeptical bears were apparently just as busy amassing a $1 trillion short position.
And the skepticism has been widespread, among retail and professional investors alike.
According to data from the Commodity Futures Trading Commission (CFTC), bearish bets on S&P 500 futures reached a four-year high in mid-March, and have only declined slightly since then.
What’s more, mutual fund managers are more skeptical of this rally now than at any time since 2010. Investment managers are holding above average cash reserves equal to 9.3 percent of assets according to Citigroup research. That compares to a cash stash of just 7.2% of assets one year ago.
This means the investment pros have been feeling the pain of their wrong-way bets on a market decline, and are feeling performance pressure for being on the sidelines as stocks soared.
Now they’re likely helping fuel the stock market rally as they throw in the towel, cover their shorts and go long.
And there’s plenty of room for stocks to run thanks to the big short that’s now unwinding.
| “There’s plenty of room for stocks to run thanks to the big short that’s now unwinding.” |
Long futures contracts on the S&P 500 have gained about 10.6% since September, but overall positioning is still 23% below the five-year average, according to CFTC data, meaning a lot more buying is likely.
Plus, short interest on the New York Stock Exchange remains at unusually high levels. In order to fall back to the average of the last six years, short interest needs to decline by another 15%!
That also means plenty of additional buying pressure that could send stocks even higher.
Or, perhaps the skeptics will be proven right after all if a sizable market decline happens soon and their big-short pays off. Stay tuned.
What’s your take? Have stocks come too far too fast and is the market vulnerable to a sharp correction?
Or will share prices keep soaring as short sellers run for cover? Let me know what you think by joining the discussion below.
Good investing,
Mike Burnick
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The Swedish Riksbank joined the latest parade of central banks trying to flood the market with cash to weaken their currencies. It boosted its QE program by 45 billion kronor, or around $5.6 billion, adding to an effort already pegged at 200 billion kronor through June. But it didn’t cut interest rates deeper into negative territory from the current negative-0.5%. And like with other recent central bank actions, the news actually caused the opposite reaction in the country’s currency. It rose sharply. As for the European Central Bank, it did nothing with rates or its QE program. That was as expected considering all the policy measures announced just over a month ago.
 It was a mixed bag on the economic front today. Initial jobless claims fell to 247,000 in the most recent week, contrary to market expectations for a slight rise. That puts claims at the lowest level since the early 1970s. On the other hand, the Philadelphia Fed manufacturing index tanked to minus-1.6 in April from 12.4 in March. That was far worse than the 9.9 reading expected by economists.
Rent a car or take an Uber? Business travelers are increasingly choosing the latter option, and it’s hurting the U.S. rental car industry, according to Bloomberg. A new study by travel and business expense software company Certify finds that 43% of ground trips expensed through its system were Uber rides, compared with only 40% for car rentals. Rental car transactions overall have dropped 15 percentage points over the past two years, one reason stocks like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) have performed so poorly in the past several quarters.
The $20 bill will get a new face starting in 2020. Abolitionist Harriet Tubman will replace former President Andrew Jackson on the currency, making her the first African American on the front of a U.S. bill. She will also be the first woman since Martha Washington temporarily had her face on a $1 silver-backed paper bill in the late 1800s.
The Money and Markets team
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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When an article like this comes out…..you can bet the rally has run out of fizz.
What is it investors do in May and before brexit in June?
The way it works in the markets is that investors who go short in a rising market, eventually cover their shorts ( losing money, of course), and maybe even buy that rising stock, THEN the markets fall, giving out a big last laugh of triumph.
If any woman should be honored with her likeness on the currency, I cannot think of a better woman to be so honored than Harriet Tubman. Her’s is a most remarkable story.
She was a Republican and enthusiastic 2nd Ammendment supporter. I agree. Jim
The Republican Party in her day bore no resemblance to the current (or even the last few decades’) Republican Party. To quote a poster on another board, “Parties are coalitions–the coalition that makes up today’s Republican party is quite different from the one fifty years ago, and different again from the 100 years ago.”
Agreed! Jim
Jim.
Hate to burst your bubble, but in those days the Republicans were the Liberal Progressives (Including Lincoln) and the Southern Wealthy Slave holders were the Conservatives…… Today, the Conservatives are still the wealthy slave holders, but now, they are called Republicans
Jim, Give em a break!
Placing Harriet Tubman’s likeness on the $20 bill is an enlightened moment.
Americans are always claiming how courageous we are and Harriet Tubman
was the real deal. I had not until recently read her story but when I did………
WOW. It is so worth spending the time to understand her life.
I agree that Harriet Tubman is worthy of recognition on our currency. However, I am disappointed that this honor comes at someone else’s expense. I would have preferred to have a new 25 dollar bill created. An undemocratic political process made this desicion, it seems to be an acceptable theme (when issues/ideas get politicized by women and special interest influences) that the true victory comes in the elimination of another truly historical figure thus erasing a part of our history. America can do better than this.
What are the fundamentals–there aren’t any–that are driving the market up?
Unless foreign instability fears are just forcing foreign money into the US market….
on a “just buy anything” basis…..to get into DOLLARS.
It’s a significant part of the rally.
I think the traditional fundamentals only set a floor to the market. We are way above that now.
There’s so much money competing for returns; prices are driven higher due to the whims of group psychology. People invest rationally, but the reasons behind those rational decisions vary in every possible way. If you can figure out what group-think is dominant, you can win. But conditions change, so you aren’t likely to win repeatedly.
S&P earnings are down the last three quarters and will continue down for a fourth. This hasn’t happened since 2009. When earnings are falling and prices rising what happens to PEs? This has all the markings of a bear market rally. Jim
i don’t know about a bear market rally. there are obvious inverted head formations in oil, transports, biotech, and many more sectors. oil (gasoline), for instance, formed a left shoulder in the $2/gal range, then an inverted head down to about $1.50/gal, and now a right shoulder is forming in the $2/gal range. this is a bullish pattern that may play out to completion in the next month or so.
Yes dennis where are the fundamentals. This market seems to be driven by shorts covering their behinds its sure not earnings. Here is another good example. American Express. Earnings are 6% LESS than a year earlier BUT higher than ANALYSTS EXPECTATIONS. Wow analysts expectations are the new ruler to measure companies by. American Express earned $1.45 a share in its recent quarter, a 6% drop from a year earlier, but above analysts’ estimates of $1.36 a share. Hurry buy stocks on analysts expectations.
The shorts are like the Federal Reserve.. Manulipating the market.
The Fed is printing money like crazy to lift this market. Nothing to do with investors. Yellen will keep this unanounced QE going for the election year. Real investors beware.
Having worked for civil rights in the 60’s early 70’s I have no objections to putting Tubman on the twenty it’s actually a smart move from a politically correct point of view. Now we need a transgender or gay Hispanic for the fifty. This might have the unexpected consequence of millions of my liberal friends dislocating their sholders while patting themselves on the back..
Rupaul hugging Che Guevara on the 50?
I think there’s a rich comic vein to this line of thought…
If I can’t object to a forty year old man being in the same bathroom with my thirteen year old daughter, Tubmans OK. Jim
Next step: Outlaw separate public rest rooms. All in one, okay. No latches on the doors. Maybe no doors. Why not, hmmm?
Chuck did you see the new outdoor urinal in San Francisco for men and ladies right beside a railway track.
“Politically Correct” actually evolved from theological correctness. Republicans seem
to not comprehend this. P.C. is used by Republicans as a denigrative term.
I have never heard Democrats use it.
It’s really an academic concept in modern usage. It is simply used, for lack of a better term, to describe Liberal orthodoxy. To be fair, Conservatives have their own version of it. Jim
Jim
The term ‘politically correct’ far from being an academic concept is the very antithesis of it and is a term of abuse used by those who are unable/too lazy to articulate any reasoning for their prejudices and therefore use this term to in order to relieve themselves of any obligation to explain themselves.
We use our currency to educate and inform the world about who we are. Harriet Tubman’s story is a worthwhile one to tell.
I just hope we can someday soon tell the story of an America that is free of racial divides. Sadly, I think the divide is too profitable to end.
Harriet Tubman is our rediculously politically correctness at its best. Her contributions to the country are minuscule compared to Jackson and others. What about Dolly Madison, John Adams, James Monroe, Theodore Roosevelt or John Kennedy?
John Kennedy would help remind us all of a good man and a great many things
The war hero Jackson, for all his great accomplishments, was also the founder of the modern Democratic Party, ordered the “Trail of Tears”, and appointed Roger Taney to the Supreme Court, who wrote the Dred Scott decision. Kennedy was memorialized on a beautiful fifty cent piece. Jim
Someone once gave as a first rule of investing to
1. Never lose money
2. Never forget rule number 1 and
3. The worst reason to jump into a stock was because the price was going up.
Just a thought.
The best reason to jump into a stock was because the price was going down? I think I’d rather find one that HAD gone down, and was beginning to come back up.
This rally is about a search for yield. There has to be a pullback, which could be vicious,and is coming soon. However looking at the weekly charts one has to conclude we are in a significant impulse move. Economists are only right when their ideas align with the technicals. Most the time they do not.
Janet Yellen adamantly does not want the Fed to be audited. Why? What is she hiding? Could part of the reason be that the Fed is actively keeping the S&P and Dow indices from correcting down to realistic values? The Fed has unlimited funds at its disposal which it could be putting to use whenever it sees short interest to be exceptionally high, creating a short squeeze and thereby punishing anyone who would dare to attempt to bring down equities to historically reasonable levels. If it was doing this, who would know, except insiders sworn to secrecy. The Fed would accomplish this in some complex, indirect manner, of course, because I doubt that actions of this sort would be legal, but when was the last time you heard the phrase “moral hazard” used? With a huge mountains of debt smothering economies all around the world, and an economic recession or worse threatening with each new release of economic data, and with the Fed’s and other central banks arsenals now reduced to a few blank cartridges that make a lot of noise but have little effect on the economy, I would claim that central banks, including the Fed, are no longer playing by the rules, and that from here on, anything goes. Investors desperate for yield are playing a role here, of course, but when the shorts get squeezed hard, I believe that the Fed is behind that.
Yes the Fed could squeeze the shorts and drive the market up and make a profit in the process. I think they have been doing this to precious metals for a long time with the help of the bank fixers. Deutche Bank is one that has admitted guilt and is offering to turn turncoat on the others involved.
According to goldprice.com the price of 1 oz of gold increased by $2.50 today. Your summary shows the opposite.
There is a time worn strategy regarding the S&P 500 on the CME. In the early days traders were buying the actual S&P 500 basket of stocks while shorting the futures, then it was refined to sectors. In the latest rally there have been some stocks that have made gains that far outpace the S&P 500 giving the shorts plenty of capital to meet margin calls. The danger is when those same deep pockets decide to sell their stocks. It was a profitable strategy with the old CRB and commodities also.
I rhink is LOCO the market that is and middle class is being PUNISHED while the Fat Cats get Free money and easy money .. we will have our Biggest Stock Market Crash ….
soon ….
pray for America to Return back to GOD
Really Mike B. you are bullish the Markets Right now, Because of Short coverings.
You are the only one in Money and Markets that is bullish, You better check w/ your Colleagues because they are all Bearish and have been bearish for a very long time.
Besides Short coverings, Why are you Bullish? Earnings have not even been hitting way lowered revised estimates. No Companies are buying their over price stocks Back (Stock Buybacks) in the last 2 months. All of the Generals are now retreating ( FANG Stocks). So is this not a classic Fake out as Larry, Mike L., And all your other Colleagues have been saying?
Stock indices reaching for resistance and proudly displaying bear crown formations. Typical herd behavior that ignores fundamentals. All risk and no reward.
when I ask my broker broker if w should sell, he always says no, everythings good! I had my securities license, but never pursued a job as a Broker, but what I do know, the brokers get paid whether you make money, or lose money, mine gets paid a % of assets invested, not a % of what he makes or loses for you. Imagine a typical sales job like selling cars, you only get paid if you sell cars. With the market up about 1% over the last 12 months, that isnt much profit for the risk, considering it barely beets keeping all of it in cash under your mattress, and low rate CD’s at 2.25% have outperformed stocks. So at what point do you decide to take zero risk, and make more than the risky market?
Well, well, well! A new twenty dollar bill with a new face on it; doesn’t that involve printing new money? What ever happened to the war on cash? Oh, I get it; print em and burn em!
If you really want to keep your engravers busy, why not do a series of new gold and silver coins; all honoring women. Various weights for various women, and then change the faces each year to profit from collectors. Shucks, forgot; that might give some credence to gold and silver as money. Maybe a few more years down the road; but can’t you just imagine Janet Yellen’s face on a gold coin.
Actually, I would rather have a Perth Mint gold bar for the year of the snake.
“Various weights for various women” may just be THE single most controversial statement I’ve ever read on this site. Talk about something that would lead to violence!
;-)
Yes the Pied Piper of data sings its song and everybody plays along. I wonder what will happen when the music stops and reality sets in. The big boys must all be out of the market now and ready to pull the plug. Of course the little guy is left and the over leveraged margin players are left borrowing all they can to ride this market to the moon. Makes one wonder if there ever really was a moon landing.
Yelen and her big mouth…Wall street said ok lets play; then the sell off started, and they had the Feds “over a barrel” … again…. and again who gave in. i.e. “threaten to raise rates, Wall St fires back with sell off… Feds cave; now rally is back on… risk off. Simple.
Mike
I’m almost 72 and never in my life have I put ~20% in one bet in the market…until now!!!!
I’m all in on a major correction thru buying bets against the S+P: VIX ETFs, etc. We’ll see, but TVIX just a couple weeks ago was $19.95, I bought at $3.50-4.50
What I think we are dealing here with is a short squeeze, causing share prices to go up. This rise might be aided by some investors taking a long position on shorts, expecting the price to rise due to many short positions being taken. It seems it is a vicious circle of alternate artificial inflation of share prices and their subsequent drop which we will be exposed to for some time, since current monetary policy has no effect.