Wow! What does the historic stock market rally really mean?

The dramatic stock market rally today might seem to be a sign that people are now convinced that the global bailout plans will work, but the simple truth is that the market gains were what they were due to only one thing: short covering. This was a dramatic but classic example of an old-fashioned short squeeze, where too many speculators over-sell and over-short a market far beyond fundamentals and normal market demand. This is also called selling exhaustion, where everybody who might have sold has sold and all it takes is a little upwards pressure for alert traders and speculators to sense the change and reverse their positions and bet on the upside. Short-sellers then have no choice but to buy at any available price. What this really means is that short-selling is too big a force in the market and overwhelms normal market activity, resulting in a very dysfunctional market with such increadibly wild price swings.

I would argue for an outright ban of short-selling, or at least severe restrictions so that it can never again overwhelm normal market transactions.

Or, maybe it would just be sufficient to regulate hedge funds and eliminate the problem at its source.

-- Jack Krupansky