The shorts got squeezed after Trump’s speech. The fast money didn’t look very smart here.
Stock market gurus are out in full force explaining the reasons for the rally. But I have not heard the real reason from a single person.
To get to the answer, let’s start by reviewing an annotated chart of DJIA futures. Please click here for the annotated chart.
To find out what happened today, we’d have to know how large players were positioned going into Trump’s speech, which took place after the close of the stock market. (Positioning, in this context, means aggressive short selling or buying prior to the speech.) These players figured that the Trump rally, which has stretched on for months, has been based on hope and that, unless the president gave details about plans for the economy, there would be a big selloff. They reasoned that, by looking at past speeches of presidents before Congress, the details are almost never there. So it appeared a perfect setup to short sell; in other words, to bet on a decline in share prices. According to algorithms at The Arora Report, these players built substantial short positions, as shown on the chart.
Short sellers tend to be the nervous type prone to panicking easily. They do so for good reason: In short selling, losses can be unlimited.
After Trump’s speech, when the market did not fall, the short sellers were forced to cover their positions, thus driving up share prices. (The initial so-called short squeeze and its progression are shown on the chart.) This forced-buying made futures run up prior to the 9:30 a.m. start of trading in New York. When the stock market “gapped up” at the open, computers and their algorithms took over and bought aggressively. That triggered other algorithms, exaggerating the move. Thus, that was interpreted as a confirmation of how good Trump’s speech was.
Read more here.
Latest posts by E.J. Smith (see all)
- A Risky Addition to an Otherwise Decent Dodd-Frank Reform: Part II - May 25, 2018
- A Risky Addition to an Otherwise Decent Dodd-Frank Reform - May 24, 2018
- A Warning for the Global Economy - May 23, 2018