You Knew the Short Squeeze Was Coming

You knew it was coming.....you knew it was coming...you knew it was coming.....BAM! Yesterday it finally came. I refer, of course, to the dreaded short squeeze, which finally arrived with a bang late Wednesday. Yesterday's 2.5% rally was the largest since April Fool's Day, which set the stage for the painful short-covering rally of April and most of May.

It would appear that the market is liable for a further squeeze from here. A number of of factors that I watch are flashing red. Consider the XLF, which posted enormous volume on Tuesday while tracing out a doji-ish candlestick that often warns of turning points. The follow-up rally yesterday also occurred on high volume; it all looks a lot like capitulation selling earlier in the week.

Insofar as higher oil prices have represented a significant squeeze on consumers and non-energy corporates, yesterday also saw an equity-positive development in that space. Crude extended Tuesday's losses after yesterday's inventory data which showed both crude and product builds. What's significant about yesterday is that it represented the first time in the whole parabolic rally that a higher high has been followed by a break below a previous low. Is this a sign of a turning point and a deeper (presumably equity-positive) correction? Inquiring minds want to know.

I and others have also observed that financial blog traffic tends to spike at panic bottoms. While there hasn't been a Bear Stearns-type surge in Macro Man's visitor figures, I do think it's telling that this week has seen the three highest traffic days of the past few weeks by a healthy margin. Another sign of a panic low, perhaps?

The S&P 500 closed right at the resistance level that I have been eying...1245 on yesterday's chart, 1241 on today's. A close above would give tape-readers reason to build at least short term longs. Of course, everything could turn on a dime, based on how today's earnings announcements pan out. Thus far, the expected earnings shortfall has not materialized; this month 26 out of 34 companies (76%) have beaten expectations, slightly better than this time last quarter, when 73% of companies had beaten.

The next 24 hours will see a number of key reports, including Merrill (MER) and Google (GOOG) tonight, and Citigroup (C) before the open tomorrow. The noise quotient will be high, and it wouldn't be a total shock to see the SPX below 1200 at some point tomorrow. After all, the underlying environment remains dangerous , to say the least.

Yesterday's CPI was pretty ugly, showing the highest rate of inflation since the first Bush presidency. And while "core CPI" apologists might maintain that the inflationary phenomenon is confined to headline, but I cannot help but observe that small businesses are more determined to pass on higher prices than at any point in the past 20 years. While this willingness doesn't necessarily correspond to an ability to pass on higher prices, it certainly suggests that some of the "core inflation complacency" that I observe may be misplaced.

Comments

[user 2lakes]

'76% beat expectations' - which ones? From 3 months, 2 months or 1 month ago? Boyah! Back up the truck, we are healed!

[mcadoo3312]

Spoken like a true Kramer zealot.

[user225084]

Looks like the new rule-of-19 scared the shorts for a moment this morning, or rather they decided to wait for the pop before shorting again. Look at the steep up/down action of nearly all the 19 stocks on the list.

[user 2lakes]

mcadoo3312 - my post was sarcasm, what is so great about beating LOWERED EXPECTATIONS? And I'm NOT one of Cramers sheep.

[iThinkBig]

I am in the camp of 10,300 by the end of October. I think it will see large swings in 2009 and then level off and beging to climb very slowly in 2011 & 2012. The policies in Washington in 2009 could radically change my opinions. But I hope I am wrong about Washington but my belief is that it takes a long time to polish a turd.

[buyitcheap]

This is the "it doesn't stink so badly" bounce. Good article Macro.

[peterthepainter]

got to be up days. don't change nothing. hope it goes up like April/ May(can't see it) - get some money out - put it back at much lower later.

[poorslob]

Watch out for long covering in a day or two

[gabe borenstein]

Nonsense ,there were no dicussions about short covering .In fact articles with historical analysis have appeard from everywhere arguing about the continuous market breakdown.Non stop, descriptive references are used to define the U.S as being in recession.Clearly not .The U.S economy has decelerated ,but is poised for a major rebound fuelled by the fiscal and the monetary stimuli and help from the J-curve..
What we have seen to date was a market response to some rational measures imposed by the Treasury and the FED.As the market paranoia dimishes and the investors/speculators respond to the facts not the distorted info(please note the record short open interest),the short covering will turn into a panic buying ,creating the foundation for fundamental mega rally .Volatility is likely to continue untill the bears address the reality and are carried out on the stretchers.
I just wonder what happened to all of the bearish attitudes when they were justfiable year ago.

[user225084]

Gabe,

If you define "the economy" as "the stock market", then yes the economy looked better the last two days. Of course, "fiscal and monetary stimuli" is the same as "the federal government running up an even larger deficit and giving the proceeds to rich speculators". OTOH, if one does not equate the economy with the stock market, then no, there has been no improvement.

If the economy is poised for growth, why did it need so much artificial life-support?

[iThinkBig]

I believe Gabe is right, but you have a point user, Main St. is getting pounded. No decent Main St., no decent Wall St. The damage will take time to heal. Bull market again in 2013 and watch out next 2-3 years.

[gaucho]

"this month 26 out of 34 companies (76%) have beaten expectations, slightly better than this time last quarter, when 73% of companies had beaten." Beaten what a revised reduction of an estimated 50% fall in earnings?

WHAT CAUSED THIS POP WAS COX WARNING about NAKED shorting!!! He put the fear of god into the shorts. WFC would have missed earning except for an accounting trick. The oil price fell 5 dollars that day> GIVE me a break The producer inflation rate is at 20% and the home builders have the lowest sentiment ever. The naked shorting is much much larger than most investors ever dreamed.


This is a must listen for stock mrket investors.
www.financialsense.com...

You may want to take all your money out of the market!

[jaywhoo]

You were pretty dead on, the news came and affected positively. What is your opinion regarding WM. If i understand panic bottoms, WM should rise over Friday? Are the shorts going to be squeezed Friday, Monday until the quarterlies?

[galewhitaker]

Here is a note for all you bulls. When I look at my charts I see that the stochastics indicate that the market is overbought and yet the prices haven't moved up at all. When you combine this terrible looking chart with price of energy I would guess that market is floating around in a pool of trouble and there is a grizzly bear with his paw on the flusher.