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SPY: Squeezing The Shorts To Capitulate

Jun. 05, 2020 8:06 AM ETSPDR® S&P 500 ETF Trust (SPY)23 Comments


  • The COVID-19 pandemic took the SPY down to Depression levels.
  • Monetary and fiscal stimulus changed the market calculus from Depression to only Recession.
  • That resulted in a more than 62% retracement from the bottom.
  • Now the SPY is above the 200-day, bear/bull line in the sand and it's reaching for a complete reversal of the pandemic selloff.
  • Will the stimulus eliminate the unemployment and the recession that the pandemic promises to create?
  • This idea was discussed in more depth with members of my private investing community, Daily Index Beaters. Get started today »

Is the SPY (NYSEARCA:SPY) in a bear or bull market? The bull market thesis is that money is pouring into equities because of monetary and fiscal stimulus, marching under the banner of “Don’t fight the Fed.” Trillions of dollars have helped pull the market back up from the bottom, with an enormous bounce that promises a “V” bottom, and a return to the previous market high. The shorts are being squeezed to capitulate and add to the move up, as they are forced to buy, in order to cover their short positions. Money is rotating into equities because of low interest rates in bonds. The market is ignoring fundamentals and moving ever higher on technical, Fed-created liquidity. The traders, using technical analysis, are coining money all the way up. The epidemic appears to be over in NY and the country is re-opening and returning to normal. Everyone will soon return to work. Shortly there will be a vaccine.

The bear market thesis is that eventually, the fundamentals determine price. Short term, the technical tsunami of money flooding the market and taking it higher will end. The recession, created by long-term unemployment and the global trade disruption created by the pandemic, will eventually determine lower prices. The SPY will not reach a new high, but rather form a classic, bear market, double top that will retest the low, as the recession rolls on well into the future. There will be no, quick-fix vaccine. The stimulus will prevent a Depression but not a Recession.

Which thesis is correct? Right now, the bull thesis is correct. The SPY keeps moving higher and it is now bullishly above the 200-day moving average. New York has stopped the virus spread and is slowly opening up. The summer has arrived and people are going to the beaches. Masks seem to be working

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This article was written by

Tom Lloyd profile picture
Every day we look for index beaters for investing and trading.

Tom’s book "Successful Stock Signals for Traders and Portfolio Managers" is available on StockCharts.com and Amazon. The StocksInDemand.com system is designed to make money using a combined fundamental and technical grade for each stock. Tom received his MBA in Accounting from St. John's University, where he taught courses on the stock market. He marketed fundamental research, technical research and quantitative research to professional portfolio managers during his Wall St. career. 

Analyst’s Disclosure: I am/we are long SDS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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