Short Covering Helps Boost Stocks 27 comments
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We broke the Russell 1,000 index into deciles based on stocks' short interest as a percentage of float (100 stocks in each decile) and calculated the average change of each decile on the day (as of early afternoon trading).
As shown below, the deciles of stocks that are most heavily shorted are outperforming the deciles of stocks with the least short interest. While the differences are not that extreme, it does indicate that short covering can be attributed to some of today's moves. Expect this trend to continue when the market gets bounces like this. With so many shorts out there, it doesn't take much for the skittish ones to run for the hills.
click to enlarge
Below we highlight the best performing stocks in the Russell 1,000 on the day (also as of early afternoon trading). As shown, TMA is up a whopping 50% to just over one whole dollar. CFC and IMB are up more than 12%, and DFS is up 10%. Other notables on the list of today's winners are MOS, WM, MS, FRE, LEH and C.
Looking ahead, based on the bounce off the January intraday lows that we are seeing today, technicals suggest a rally to the top of the downtrend line as shown in the chart below. If we can break through that downward channel, it will be a good sign for the bulls (and mark one of the prettiest double bottoms that we've seen in awhile).
However, it's still important to not treat this as anything but a rally in a downtrend unless the downtrend is broken.
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This article has 27 comments:
All kidding aside, I like what Rich Santelli said this early morining: "This is huge."
This is not the absolute end to this crisis but its a big step in the right direction.
What fantastic timing by the Fed. Just when, from a technical point, the Fed unleashed their time bomb. What happened to the crasendo to the down side? Will it still happen?
"Fed gambet" ? Are you kidding me... that's one of the best moves I have seen the Fed make in over a quarter of a a century.
You don't understand. What the Fed did today its NOT inflationary. That was the beauty of it. In this action or swap what they are offering is not the printing of more money. They are using Treasuries (securities already in the market and owned by the gov.) to swap the bad debt. In addition, this was a world coordinated effort and you will see more of these type of tools being used. The Fed did not cut rates today and the Dow was up 416 points. Finally, what will happen when the ECB cuts and it will look differently at the dollar now that we have the swap auction by the Fed?
the fed did exactly what we expect them to do if they are going to do their job. keep up the good work fed.
But it is only 200 billion for only 28 days and my own calculations indicate that the entire US financial sector needs 2 to 3 trillion more debt in the year 2008 in order to stay 'profitable'.
Of course no such level of fresh capital is there, after all we are into the so called 'credit crunch' days.
And I am not alone in my easy to understand calculations, here is a quote from marketwatch.com:
FBR's Miller estimates that $11 trillion of outstanding U.S. mortgage debt is supported with roughly $587 billion of equity. That's a leverage ratio of 19 to one.
I hope the link to the source file works (it is an aspx file and can easily destroy your computer), but I'll try anyway:
www.marketwatch.com/ne...
I hope the link works and I hope all Wall Street traders drink at least one gallon of 15% alc expensive wine this evening now we had a nice 416.66 rise on the DOW.
Oh, just by the way: what is the number of the beast?
Of course it is not for nothing a website like this does not include the rest, for example when I try to visit nasdaq.com and I click a bit around my entire windows version included firewall and anti spy software breaks down.
It is weird but true: I can only visit nasdaq.com if afterwards I install a clone from before that visit...
Lets not forget their is more weird stuff in this world: For example the US has a strong economy... That's also weird when you study the obesity details, now these folks work hard...
We will have another "sucker's rally" and triple bottom (as we did in late 2002 and early 2003) before we're back off to the races. In the meantime I'm selling into the rally, and shorting on the way down with SDD, all while steadily building a war chest for 2009... :)
Personally I don't think this will change the fundamentals (besides financials book-keeping one quarter), except possibly to the downside. It increases the downside risk to the US economy in my opinion. As this crisis evolves, fundamentals will ultimately be the clue for the future, and I sadly don't feel that this move will change that. It smells like a desperate last attempt, even though it's not time for it.
Anyways, good article. Keep up the good work. I use this opportunity to roll forward covered calls on new positions, and are ready to go short around the trendline mentioned.
Technically (which efficient market theory says is "all things considered") we have the leadership areas that have lead the start of the bull and the roll over process into the bear being the small cap and value end of the spectrums, and they have already thoroughly broken lower than their January lows (look at $RUT, $RUV, $IJE, etc.). The broader market has been very faithfully following the lead of these groups, which strongly suggests that, after some bouncing, the S&P 500 will take up residence below its January low.
This whole market condition in '08 is remarkably similar to the 70s. After the 70s, every economic downturn has been countered with a Fed loosening. This brought the investment money on the sidelines back into the stock market because there was no problem inflation. But now we have a downturn CAUSED by loose money and the Fed must fight loose money with still more loose money. The mounting inflation caused by this is causing the money on the sidelines, which stands at high levels seen at stock market bottoms, to choose commodities over stocks, which causes still more inflation! It's a cycle that feeds on itself somewhat.
We had this in the 70s where the stock market made no progress for the 15 years from '66 to '82, but a 15 year commodities bull raged. The 70s version was defused by, among other things, a quick return to very cheap oil in the mid '80s. But in our current version, we are going to have very much more expensive oil. The defusing of this investment money inflationary spiral effect may be tough this time. If you look at a chart of paper vs hard asset investing over the decades, you see a clear and powerful cycle at work and where we are now in that cycle. I posted this chart at www.theoildrum.com/nod...
If this doesn't link directly, go to "Drumbeat" for March 9 and scroll down to near the bottom of comments for the chart - posted by "netfind". It clearly shows where we are on the issue of over/under valuation of commodities.
Why, the Fed comes to the rescue with a few more billions in "auctions," accepting worthless paper as collateral. No margin calls and no payback ever required. When that fails, the Fed just buys the paper. (Just think how nice it will be when the Fed owns 90% of the homes in this country, and how appreciative those who have defaulted on their mortgages will be living in their homes without making anymore payments....think the Fed is going after them?)
And who loses? We do. Milk at $10 a gallon. Bread at $7 a loaf. A worthless dollar here at home and a hungry government waiting to tax us to death.
But, all is well. The Dow is back to $12,000!
Fed is trying to run the economy, bail out the banks and write cheques left right and centre. Aren't they only supposed to be concerned/mandated on monetary policy to promote growth and price stability?
As far as fixing the economy, How about fixing the government first. Less taxes and less interferrence in the markets. Anyone who calls for a government bailout is a socialist, or communist. That's not what free markets are all about. You numbnuts should read our constitution. The government presently is bankrupting us and will descimate us in the long term. You want America strong, bring back manufacturing here. Make laws about CEO's and others in stock option distributions that are equal for everyone. Build more nuclear power plants, and we will have enough oil for ourselves to power the autos. Yes, we have to have our peple doing the jobs that illegals are doing now. Yes, it will be a bitter pill, but it will make us stronger in the long run. Less government, less welfare, less handouts, no bailouts, just hard work which this country was founded on but now is about doing the easiest way out without work. There is no such thing as a free lunch nimblenuts, remember that.
This won't be over until a few banks, insurers, lenders, retailers, and other companies go out of buisness. That's when you go long, but only on low P/E stocks and a very selective few which I still can't see yet. It is much easier to short than go long.