Data Suggests This Is Not a Short Covering Rally

For those that think the rally which began on March 9 is simply a very strong short covering rally, the data seems to suggest otherwise.

Short interest data for is released bi-monthly. Using results for the S&P 100 from March 13 to the latest May 29 report, Birinyi Associates analyst Jeffrey Rubin found that the change in stock prices cannot be correlated to the change in short interest.

Avon Products Inc. (AVP), for example, gained 55% during the March 13 to May 29 period, but the short increased actually increased by 4.5 million shares. DuPont (DD) has seen an eight million share increase in the number of shares sold short, but the stock rose 46% during the period. Then there’s EMC Corp. (EMC), which has seen the sixth greatest amount of short covering but is up just 10%.

In fact, 29% of the S&P 100 members have seen an increase in shares sold short, Birinyi noted.

General Electric Co. (GE) has seen one of the biggest decreases in short interest as 47.9 million shares were covered and the stock gained 40%.

“While at first blush it may appear that GE supports the short covering hypothesis we would, however, suggest that it does not,” Mr. Rubin told clients.

GE has 10.6 billion shares outstanding. Therefore covering 47.9 million shares is just 45 bps of the company. During the period, GE also traded 7.2 billion shares. The short cover represented only 0.67% of that volume.

Comments

[Alphameister:]

One more leg kicked out from under the bear's stool.

Jun 15 09:21 AM

[denko:]

Err ... no!

The man is saying that MORE shorts where written, hence a bearish sentiment endures, despite the recent bounce?

AND

That the recent bounce was not forced covering - either. Hence bullishness.

Mixed signals - Ya'd think¿


On Jun 15 09:21 AM Alphameister wrote:

> One more leg kicked out from under the bear's stool.

Jun 15 09:39 AM

[AndrewBaker:]

When prices rise and at the same time more shorts are in play, then methinks that a correction is due, and we seem to be getting one right now ...

Jun 15 10:49 AM

[Larry House:]

I think it was a hope/relief rally--not short covering. Instead of looking at stock movement, how about lookiing at economic data. At some point market action and fundamentals come together. The real question is what is that point. Forget bear/bull crap. Look at what is going on in the economy.

Jun 15 10:59 AM

[optionsgirl:]

I guess you left your crystal ball home. I did. too. To make money, follow the trends. Use stops. Buy protective puts and calls. The economy is not in good shape. The Federal government has taken drastic steps that can backfire in our faces. Globally, Europe and Asia face some formidable challenges. The Middle East and N. Korea pose threats to stability. Gasoline is $.17 higher per gallon than 2 weeks ago. Nat gas has plenty of inventory. We've all read this --

So, what's new? I really don't have any complaint against you or your article. I have more of a complaint with SA. It's getting too repetitive and boring. This article is just a symptom.

Jun 15 11:27 AM

[Fred Voetsch:]

On Jun 15 10:59 AM Larry House wrote:

> I think it was a hope/relief rally--not short covering. Instead of
> looking at stock movement, how about lookiing at economic data. At
> some point market action and fundamentals come together. The real
> question is what is that point. Forget bear/bull crap. Look at what
> is going on in the economy.


I agree but of course their was plenty of short covering as well.

View preferred view of the market is to consider the various "pressures" on the market and while there remain considerable downward pressures on the downside (poor economy goin forward; poor demographics; continued deleveraging; overpriced stock market by historical standards) the gap left by the crash in early October left considerable pressure on stocks in the near term and the subsequent decline in January and February built up that pressure. Just like the spring of last year the market was ripe for a rebound.

Now is the time to go back to fundementals and determine where this market is likely to go. Almost all of my data and sources suggest continued downward pressure, likely for several years to come.

Jun 15 11:48 AM

[greg weitzner:]

It may not be a short covering rally but in my opinion it is in many ways an artifical and overly sanguine one. Despite the many problems and lack of strong earnings, stocks are trading up in anticipation of a recovery that I believe is not in sight yet. I expect the Dow to hit 7000 well before it reaches 9000.

Jun 15 12:23 PM

[jhartz:]

If it isn't short covering, and it is obvious it isn't economic fundamentals, then it must be systematic market manipulation mandated by the Great Obama as he wrings the last bit of value out of a soon to be tanking American Dollar.

How long can the government keep bonds, securitized real estate mortgages and the stock market up? Especially given the fact that they are trying to keep interest rates, the price of gold, and fears about all that toxic real estate debt in check?

Something will have to give, and there are already plenty of signs that this entire "feel good" series of economic predictions isn't working on consumers. No one is being fooled by Obama's desperate machinations. Crap that is covered in sweet smelling rhetoric will still smell bad when sniffed. You can't cover up such a big cesspool, not long term.

This whole farce will be well on its way to being fully unravelled by mid July. Obama, Summers, Bernanke, Geithner and the rabidly venal band of banksters will be shown up for what they actually are: economic terrorists.

Jun 15 07:43 PM

[Moon Kil Woong:]

This is pure silliness. I don't think many people think this is a short covering rally. First it would not last this long. Second we know this is coming from money running from long term bonds and fixed rates because we see a corresponding rise in commodities.

Just because this is not a short covering rally doesn't mean it's a healthy one. It is a market rebalancing in the light of looming inflation. After inflation hits and interest rates rise (which they are) you will see the classic adverse effect on the market to higher rates set in. For those who don't know how rising rates effect the economy, grab any economics textbook and start reading.

Although you could argue rising rates are in light of a recovering economy, this can be faulty logic. Unlike what the Fed and Treasury are peddling it is not as simple as A = B. Inflation can come at any time for a variety of reasons, commodity shortages (oil embargoes), misguided Fed expansionism, too much economic stimulus induced by mass deficit spending, an overly lax low rate policy by the Fed, when productivity falls faster than money supply, when foreign debtholders start buying everything under the sun to diverify or rid themselves of US Treasuries, expansion of the money multiplier, or any combination thereof. As you can see only the second to last reason can be attributed to an economic recovery.

Jun 15 10:43 PM

[Did U Think...:]

A sucker is born everyday it seems.

Of course it was more than a short covering rally. It was a rally which expected reflation was going to happen. It was the Fake Unamerican Currency drop by Keynesian Bernanke rally. Bernanke's helicopters were grounded by a massive storm called Chinese objections which sent forth bolts of higher interest rates regardless of Bernanke's QE program.

Now that we have received the direction from China not to inflate our way out of debt we will now return to our previously scheduled deflationary crash.

Jun 16 03:14 AM

[CLH:]

The shorts need more pain in order to learn that shorting is dangerous to your financial health.

Jun 16 07:25 AM