Stock Rally May Stall After Short Covering (David Rosenberg)

“It would stand to reason that a lot of this push-up

in the market reflects short-covering on very light volume,

which have exaggerated the price gains of late.”

By Lu Wang

Sept. 14 (Bloomberg) -- This month’s U.S. stock rally started with short interest at a 13-month high, suggesting the gains were driven by traders who had to buy back shares after betting against them, Gluskin Sheff & Associates Inc. said.

Short interest, or total number of shares sold short, climbed to 19.2 billion on the New York Stock Exchange and the Nasdaq Stock Market at the end of August, the highest level since July 2009, Bloomberg data showed. Since then, the Standard and Poor’s 500 Index has gained in eight of the past nine days, jumping 6.9 percent this month.

“The shorts had a field day in August,” David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, wrote in a note yesterday. “It would stand to reason that a lot of this push-up in the market reflects short-covering on very light volume, which have exaggerated the price gains of late.”

The S and P 500 yesterday rose to its highest level in a month after surging Chinese production and a forecast for faster growth in Europe boosted confidence in the economy. The benchmark dropped 16 percent from its April peak to July low on concern the U.S. may slip into another recession.

“It is fascinating to watch how emotions shift so suddenly,” Rosenberg said. The current advance may turn out to be one of the market’s “huge headfakes,” similar to rallies in the summer of 2000 and the fall of 2007. “It doesn’t feel good to get head faked, but Mr. Market has made a living doing this to people,” Rosenberg said.

Past Slumps

In 2000, the S and P 500 climbed 7.1 percent from July to September before succumbing to a two-year slump. In 2007, a two- month, 11 percent surge from an August low heralded another bear market. After hitting an all-time high of 1,565.15 on Oct. 9, 2007, the benchmark plunged 57 percent over the next 17 months.

Rosenberg said the S and P 500, which has been stuck in an 80- point band between 1,050 and 1,130 in the past two months, will soon revisit its July 2 low of 1,022.58 as a slowing economy forces analysts to slash estimates.

It is likely “that when this prolonged trading range breaks, it will break to the downside,” Rosenberg said.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

Grandpa

The Repetitive Anemic Volume Manipulative Short Squeeze

 During the initial 8 trading days in September, the S and P 500 launched 73 points (7 percent) on average daily trading volume of 3.617 billion shares.

During the final 8 trading days in August, the S and P 500 dropped 26 points (2.4 percent) on average daily trading volume of 3.809 billion shares or 192 million more shares per day than the initial 8 trading days in September.

Meanwhile, CNBC just realized High Frequency Traders might have an impact on the overall equity market and after pooling their coffee money, produced Man Versus Machine which surely places them in contention for a Peabody Award.

Remember the ramp to dig yourself out....