Another "massive" stock market rally? It must be another short-squeeze

Hedge funds and in-house proprietary trading desks at the big banks are desperate to make a quick buck and shorting stocks is one of their favorite tools, especially in a weak economy. There is also plenty of "monkey see, monkey do" on Wall Street when it comes to following apparent trends, plus plenty of amateur "investors" tagging along as well. But none of this is "real" selling in then all they are doing is building up a massive deficit of shares that will eventually have to be bought back to cover their short positions. The market cannot go too many days before short-selling reaches the point of "selling exhaustion", where there are simply no more "investors" standing in line ready to short stock. At that point, saavy speculators realize that the short-term trend has ended and reverse their positions and bet on the upside, kicking off yet another massive short-covering "rally" or "short squeeze."

This does not necessarily indicate that a bear market "bottom" has been reached, but simply that "range traders" or "swing traders" have reached their short-term speculative trading bottom and are happy to ride in the other direction.

Alas, the biggest problem with a massive short squeeze rally is that it goes too far the other direction too quickly and may even blow past the upper end of the range-traders' range, leading to increased volatility as speculators grope in the dark for a new sense of the short-term trend.

Another specific event factor today was that smart traders do not want to be on the "wrong side" of the Federal Reserve when another rate cut is expected tomorrow afternoon. Better to be ready with some long positions in advance of a rally and have some dry powder for renewed shorting.

None of this should be of concern to serious, true investors, who should continue to focus on long-term business fundamentals.

-- Jack Krupansky