Thursday, March 26, 2009

Blood Curling Screams

Those blood curling screams you hear are short sellers on the wrong side of the current trade. Another brutal day of the market working against the shorts. Today we surpassed the biggest rally we have had since the bear market began in 2007. In November we had a rally of 24.22%. Today we are right at 25%. I personally think we still have alot more to go on the upside. I also personally think we have seen an absolute low without a major systemic event. There are two problems with that statement. One, systemic events are inherrently unpredictable but I would say we have a very high probability of having one - either in Europe or the insurance industry. The second problem with that is if we have one, there is no way to guess on timing. Personally I would guess summer to early fall.

I heard a disturbing stat today. Apparently the entire short interest in the NYSE went up 10% from the previous reading. They measure it twice a month and this was the mid month March reading. To me this means that alot of people tried to call the top to early and that alot of the shorts have not gotten squeezed out. More evidence of plenty of buying pressure that could continue to push the markets higher.

Famed short seller Doug Kass had a great write-up on Why the Bears are Wrong where he continues to lay out his case that the low in March will be a likely generational low. Once again I would agree with him without another systemic event. To repeat myself I would say historical precendent would indicate a high likely probability of another systemic event.

In summary, 10 out of 12 factors (including our newest, market internals) on my watch list are in an improving mode. Though many variables are currently accorded relatively low grades and the outlook remains debatable, the delta (rate of change) in almost my entire watch list is improving and flashing a green light for the U.S. stock market.

A classic "wall of worry" is being reinforced by an overwhelming consensus that the recent advance was a bear market rally. Moreover, the negative chatter appears loosely constructed and fails to credibly argue against the salutary effect that $4 trillion of stimulus will have on the domestic economy.


While it is unrealistic to expect a straight up move, I am growing increasingly confident in my variant and optimistic view that the early March low was not only a yearly low but, quite possibly, a generational low.

One of the 2 factors that is not signaling the all clear for Mr. Kass is maybe the most important one, the debt markets. Mr. Kass fully recognizes this and it worries him. Something I am following very closely the last few days. A good summary can be seen here in this WSJ article.

If there really are signs of financial recovery, nobody told the bond market. Treasury.....But credit markets have hardly budged. Corporate debt is still priced for disaster. Investment-grade nonfinancial U.S. corporate bonds rallied in January but now have stalled, with spreads about four percentage points over Treasurys, based on Markit iBoxx indexes. More worryingly, even as bank stocks have climbed, with the KBW index gaining 54% from its lows, U.S. senior bank-bond spreads remain at their widest levels since Lehman Brothers collapsed.

This cannot be ignored but worlwide there are signs of life. I would just guess somewhere in the road ahead the life may just scquechled by an unpleasent surprise as the unwind continues.

1 comment:

Travis said...

FYI, if it means anything, from Bespoke Research:

There's been a lot of talk over the last two days regarding the sharp rise in short interest as of mid-March. Since the end of February, short sales on the New York Stock Exchange increased by 10.7% from 14.6 billion shares to 16.2 billion shares. At face value, this is an amazing statistic given that the market had a decent rally over that same time period. Usually, when the market rallies, short interest declines.

If we dig into the short interest figures for individual stocks, however, we find that nearly half of the increase in total short interest came from Citigroup (C), which saw its short interest rise from 203 million to 999 million shares following the government intervention which caused an arbitrage between the preferred and common stock. If we back out short interest figures for Citigroup (C), which is a stock that many would argue shouldn't even be listed, short interest would have only risen by about 5.3%.