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Short Sellers, Not Citi, Spurred the Rally


After Today’s mega-rally, which saw the S&P 500 rally 6.4%, investors breathed a sigh of relief. For the moment at least, the selling had stopped, and maybe, just maybe, the financial crisis was turning a corner.

The gigantic bounce was attributed to a Citi memo stating its newfound profitability. But investors might want to consider whether the move had more to do with short covering and less to do with the solvency of the banks. Says MF Global Research analyst Nick Kalivas.

The SEC says it is likely to change short selling rules. The up tick rule may come back and other measures relating to short selling are under review. This is not a game changer but will provide a short term relief rally.

The shorts aren’t stupid. In September, many got squeezed when the SEC suddenly banned short selling altogether. This time the shorts did the smart thing — they covered.

Which doesn’t mean investors shouldn’t enjoy the rally. A 40-point move in the S&P 500 is still a 40 point move and the rally could be the prelude to a 25% bounce, similar to the one that occurred after the November low.

But a little caution never hut anyone. Says Schaeffer Investment Research’s Nick Perry:

…rallies in a bear market may “feel” good but they must be viewed in context. By that, I mean it is important to understand they can be violent but short-lived. Bulls markets trend higher with sudden pullbacks. Bear markets grind lower with sudden rallies.

Enjoy it while it lasts.


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