Tuesday, May 5, 2020

Morning Note

Yesterday’s late rally, as narrow as it was, is gaining steam, and, I suspect, some breadth heading into this morning’s open.

While surveys detect a notable bit of hesitation among folks in terms of reengaging in economically-stimulative activity, traders appear to be buying on optimism over the “reopening” of economies throughout various jurisdictions; which makes sense, given the still-prevailing buy-the-dip/fear-of-missing-out bias.

Also, helping the S&P 500 along is the relentlessness of bearish futures traders who continue to pile in on the short-side; they help as, in acts of self-preservation, they’re virtually forced to cover their positions when the market spikes against them (short-sellers face unlimited downside risk when the market moves to the upside). The data -- as well as the price action -- suggest that over the past few weeks they’ve been circling right back around and reestablishing their short lines shortly after covering their previous bets.

I get it, going short jibes with general conditions as well as history’s bear market script (strong initial selloff, followed by strong several week to several month rally, followed by a rolling over to new lows). However, ironically, high short-interest can also serve as some real support for a rally as it effectively, if only temporarily, has the bears, out of necessity, rushing to the bull side of the boat.

Asian equities were mixed overnight, Europe’s in rally mode this morning, commodities (ex-ag and save for gold and palladium) are rallying as well, while treasuries are taking a hit as yields spike on optimism, and, I suspect, on yesterday’s news that the Treasury Dept is about to head to market to borrow a fresh $3 trillion. Although the Fed stands ready to make sure it has no trouble raising the debt load at record-low interest rates...

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