Get Ready to Profit - This Run Will Be Over Soon
By Shah Gilani
The market's obviously been on a tear. The question now is, after shorts have been ripped to shreds having been forced to cover at higher and higher prices, propelling stocks higher and higher, is the run over?
By the middle of February 2016, NYSE short interest was over 18 billion shares, just shy of its all-time record highs in July 2008. Central bank promises from the ECB, China, and Japan, as well as the Federal Reserve in February looking less and less like they'd hike again anytime soon, was fuel poured on the fire that would start to burn all those shorts.
This rally fuse was lit by institutional players (big money hedge funds and traders) to get shorts to cover at higher and higher prices after players got long derivatives to ride stocks up. It's been a beautiful trade for them. But it's petering out. The run may be over, or it could last another week, maybe two.
Every stochastic indicator I looked at, and I rely heavily on proprietary indicators, showed markets and individual stocks massively oversold in February. They could have gone lower, in fact they could have crashed. We were close to that point. But gutsy traders with a lot of capital stepped in to try and effect a rally, if they could. And they did.
Now we're as massively overbought as we were oversold in mid-February. Ninety percent of S&P 500 stocks are at so overbought they're bumping against extreme overbought levels. However, momentum being what it is, we could see another week or two of attempted buying.
If we get a slew of positive fundamentals stacked up on each other, and not just talking points about what looks better globally, but solid data pointing to economic growth picking up, then this rally could take the Dow over 17,500 and stocks could consolidate there. And we might be out of the woods.
That's a really, really tall order. In fact, it reminds me of the summer of 2008, when I knew things were horrible and markets rallied. I thought, this is insanity. But it happened. However, just as this rally got triggered off oversold conditions and massive short positioning, the next downdraft looks like it will get triggered off massively overbought conditions and the fact that a huge number of short positions have been covered.
My gut tells me, and my metrics point to, a reversal in the offing. To quote Tyler Durden of ZeroHedge, "Just as the record short interest in July 2008 correctly predicted the biggest financial crisis in history so another historic market collapse is just around the corner."
Remember, the market saw short covering in the summer of 2008 on the heels of record shorting. But after that buying power was quickly exhausted, the markets weakened and with no conviction buyers to be found, bounded into the fall of 2008. And I do mean fall.
Are we going there again? It increasingly looks like it's possible.
Next week, I'll lay out the case for what could happen so you see what I see.
Hope you have a great weekend.
From Short-Side Fortunes recommendations posted on The Money Map Press website. Click on 'Short-Side Fortunes'.