There's nothing like a Bear rally.
Yesterday, the Dow Jones Industrial Average rallied up 379 points after days of selling. People doing technical analysis attributed the rally to an oversold market where this had to happen.
"Had to happen?". I'm skeptical. The fundamentals have and are deteriorating, profits and earnings are falling to the floor, demand is dropping dramatically, and people are losing their jobs; therefore, I don't quite know if the market "has to rally" and could potentially go downward with no daily upticks [which is unlikely, but it could happen].
However, on what did the market rally propel itself?
Citigroup
The news that Citi had positive operating profits in the first months of 2009.
Ok, So?
I don't think the problem has been that banks are not making profits in their operations. The problem has been the amount of worthless assets that can't be sold and how their capital base has been wiped out because of that factor.
So, when the CEO says that they have posted a "profit" [in quotations for a reason] without taking into account write-downs and asset devaluations, how can you rally up 379 points out of that? I thought the people at Wall Street was slightly smarter than that.
In sum, the rally yesterday was just a result of investors overlooking one day the problem that has been in their face for months and months.
Short Squeeze and Closing Positions
The second factor that created such a big rally was the short squeeze. The short interest in the market has been very high and people got hurt yesterday when the markets started to go up. Margin calls due to big upswings in some stock prices probably caused a lot of people to buy back securities in order to close their positions. Additionally, I believe that a lot of investors were also closing some of their short positions and racking in the gains.
This means that when you add up an uptick on worthless news and combine it with a short squeeze, you get a big bear rally.
CNBC may say that this is the beginning of the turnaround or something, but remember, that's the same thing they said in the beginning days of the year when the market rallied.
So, hold on to your shorts [in a hedged manner], and continue to ride down the mountain.
-Not Vikram Pundit
