Extreme Rally on The Forefront as Obama Stimulus Plan Looking More Likely

So why is it lately we get these extreme rallies?

In a word short covering. As a quick review shorting a stock is selling the position before you actually own it with hopes of buying it back at a better (lower) price in the future. Short sellers are often quick handed and have a fire for covering (buying the position back) quickly.  The reason for this is simple, shorts have unlimited losses as a stock, can in theory, go up forever.

More importantly shorts have as of late covered only to quickly begin deploying their positions, with much success.  Eventually, and we are not calling this move today or even tomorrow, enough good news will be had that the shorts will not want to re-establish their position, but yet want to buy (go long) and drive prices much higher. 

There will always be shorts, and this is a good thing as shorts provide liquidity, and price discovery, although we have written many times that the repeal of the “Uptick Rule” would be tested (more on this at a later time), many shorts will eventually be pushed to become longs and then the market moves may begin.  As this gravitation from short to long eventually happens, these giant moves may slow and markets may move upward, in a slower, more diligent way, which will be more normal action.  JK

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