For those wondering what unleashed today’s ferocious post-Trump, post-hawkish Fed speech rally, the reason may have nothing to do with optimism in the economy or another inflow of retail funds, and everything to do with incorrect – and bearish – positioning ahead of Trump’s speech last night.
According to an analysis by the Arora Report, flagged first by Market Watch, and substantiated by various Wall Street comments early in the morning, ahead of Trump’s speech various “large players” were positioned bearishly, assuming that the market rally has been based on hope and that, and that unless the president gave details about plans for the economy, there would be a big selloff. The reasoning, broadly echoed by strategists until yesterday, is that by looking at past speeches of presidents before Congress, the details are almost never there. So it appeared a perfect setup to short sell. And, according to algorithms used by The Arora Report, major traders did just that, building up substantial short positions ahead of Trump’s speech, as shown on the chart below.
However, just like after the Brexit vote, and after the Trump election, following Trump’s speech, when the market did not fall, shorts were forced to cover their positions, sending prices soaring. The initial squeeze and its progression are shown on the chart. This forced-buying made futures run up prior to the 9:30 a.m. start of trading in New York. When the stock market “gapped up” at the open, computers and their algorithms took over and bought aggressively. That triggered other algorithms, exaggerating the move. Thus, that was interpreted as a confirmation of how good Trump’s speech was.
As MarketWatch cynically points out, talking heads on TV were quick to say that the stock market was rising because Trump was conciliatory in his speech and muses “what happened to those same talking heads’ pronouncements a day earlier that the market would fall if Trump failed to mention specifics of his economic plans?”
So quantifying the move, according to the Arora algorithms, about three-quarters of the increase in stock prices today is from short squeezes. Traditionally, spikes resulting from short squeezes arising out of positioning from an overbought market tend to reverse themselves, the report notes, however over the past year, every single attempt to short the market into submission has resulted in even greater ramps higher.
“For that reason, as hard as it is, it is prudent to be patient and wait for pullbacks to buy stocks. There are reasons to be bullish. But, alas, the market is not likely to keep rising in a straight line.”
Unless, of course, “it’s different this time.” And while that hardly likely, the answer to when normalcy may finally return, remains elusive. For now, however, money talks, and anyone who was long into today’s rally is richer. Those who were short into it, on the other hand, well…
via http://ift.tt/2lzUljY Tyler Durden