Short Squeezes, Rumors And The Selling Stampede

With continued uncertainty in major markets, two veterans give their take on the chaos in global markets, including short squeezes, rumors and the selling stampede.

Short Squeeze Erupts Across Asset Classes – A broad and sharp short covering rally swept markets on two continents. The rally was most pronounced in two assets that had underscored the market’s sharp weakness earlier in the week.

The rally in crude had actually started the day before when headlines about comments from the UAE oil minister caused a sharp reversal just as crude was about to break below $26.

The crude rally continued into Friday without a flinch even though there appeared to be no corroboration nor follow-up to an OPEC meeting or agreement.

The other short squeeze vehicle was the recently battered financials. As I noted in Friday’s Comments, solid results from Commerzbank helped put a bid under European financials. Adding to that was the widely noted purchase of a large block of JPMorgan by its CEO and positive comments about Deutsche Bank by several high German officials.

That energy/financial combination set the Dow off to an opening spike of well over 100 points. After the opening liftoff, stocks paused for a recheck but the pullback was mild and limited.

Aided by a further up-leg in oil, stocks moved higher, again and again in several up-moves before plateauing in early afternoon.

Then with about two hours to go in stocks, the crude pits threatened to attack $30. That was enough to prompt a new round of buying in equities.

Stocks moved steadily higher in late trading, aided in the final half hour by a flip to the buy side in the market on close indications, leading to an impression that there would be over $500 million to buy on balance.

A Revered Alumnus – I was deeply saddened to hear over the weekend of the untimely passing of Justice Antonin Scalia. Justice Scalia was a graduate of Xavier High School, as am I. Xavier is a Jesuit school that attracts students throughout the metropolitan region and New Jersey.

While Justice Scalia was a few years ahead of me, in both our tenures, Xavier had a mandatory Junior ROTC program and the regiment was a key part of school life. Both Justice Scalia and I were awarded one of a handful of four year academic scholarships that are awarded each year. There the similarity ends. Scalia applied himself and graduated as a Lt. Colonel and class valedictorian. I took a more adolescent approach, just doing what was needed, thus graduating a lowly private.

Nonetheless, Xavier helped most its students to learn to think clearly and reason carefully. None more so than Justice Scalia. We are intellectually poorer for his loss. Ave Atque Vale!

Overnight And Overseas – Tokyo rebounds to close slightly higher. Hong Kong and Shanghai were up and India dipped a bit. European markets roll over into negative territory. Crude higher on production freeze story. U.S. futures higher – part catch-up; part crude induced.

Consensus – Crude again has the conductor’s baton. Stay wary, alert and very, very nimble.

Jeff Saut, Chief Investment Strategist at Raymond James, had the following note today:

Did the selling stampede end last Thursday at session 31? The answer is, “maybe.” The SPX made an “undercut” low below its January 20, 2016 intraday low of 1812.29 last week, but the Dow did not. While the Dow closed below its August 25, 2015 closing low of 15666.44, by a mere 6 points (not decisive), it did not take out its intraday low of 15370.33 made on August 24, 2015.

I guess one could argue that it was an undercut low on a closing basis. The economically sensitive D-J Transports, however, looked to have a bottom on January 20 and are suggesting there is “no recession” in the foreseeable future. As for me, I am still waiting to see if the equity markets can string together more than three consecutive positive sessions to break the back of the current selling stampede.

By Art Cashin, Head of Floor Operations at UBS
February 16 (King World News)