After Wednesday's close all the market reporters were doing specials on the possibility of a correction. The markets had reached critical support. Chicken Little was warming up for his featured performance.
Right on cue the GDP for Q3 is reported before Thursday's open and a classic short squeeze begins. The Dow roars off to a +200 point gain and those same market reporters are gushing with bullish comments. Of course that gain was only about half of what the Dow lost in the prior 4 days.
It did not hurt that the Dow and S&P had closed right on critical support on Wednesday. That primed the fear factor for shorts. They hoped that support would break but were instantly ready to bail if a rebound appeared. The market gapped open, stops were hit and those without stops were forced to chase prices higher. Retail investors without a lot of common sense bought the market based on the sudden rebound out of the recession.
The economy did not rebound out of recession on Thursday. It has been rebounding for several months but this is the first look at the GDP for the entire third quarter. Also, a lot of the GDP gain came from cash for clunkers, which is now over. Also home buyer stimulus, which appears to have suddenly slowed because new home sales in September actually dropped -3.6%. Also, a lot of the GDP gain was due to technical factors rather than a sudden surge in economic activity. Several companies were on CNBC Thursday and claiming they were not seeing a rebound. Burger King was one. If Burger King is not seeing an uptick in burger sales then how strong can the rebound really be?
I don't want to get sidetracked here on the merits of the recovery. I only wanted to mention that the rebound was a perfectly executed short squeeze and may not have any staying power. However, we are almost out of October. Mutual funds with October year-ends should have concluded any year-end transactions on Thursday. Let's see, markets at critical support, major economic announcement and funds faced with a timing deadline to do something even if it is wrong in order to complete their portfolio restructuring. Sounds like the perfect recipe for a short squeeze.
Here is the next problem on the agenda. Let's say you had a fund and you meticulously orchestrated the perfect year end close. You kept enough winners to show a profit, sold others to raise cash and dumped all your losers to cover the tax ramifications of those profits. Let's say the winners you kept/bought to dress up your portfolio for those year-end statements are not the stocks you want to hold for the rest of the calendar year. When the calendar turns over to a new fiscal year on November 1st you are free to dump the rest and go to cash while you wait to see if the recovery is going to stick. I am no expert on fund strategies and I do expect a rally in November. I just think we need to be cautious for a couple more days to make sure the rebound sticks.
Futures are down -2.75 at 4:AM.
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