Many investors not familiar with the mechanics of short squeezes are confused by the strength of the stock market rally that began after the S&P 500 hit a coronavirus low on March 23. Short-squeeze-related actions were the force that unleashed the strong rally.
As the market continues to rally, the odds that the stock market will set a new record within the next two months are rising. I see it as 55% now, up from just 30% on May 13. As impressive as that rapid shift is, I will wait until the odds reach 70% to my call.
What will push the likelihood to 70%? The second leg of the short squeeze has to start. And although stocks are surging on Monday, I am not yet seeing this — bid-ask spreads aren’t widening and trades aren’t being done predominantly at the ask price.
Investors should consider what the trigger for that rally may be. One could be success with a coronavirus vaccine. Moderna MRNA has announced positive interim clinical data from its coronavirus vaccine Phase 1 study; the immediate stock market reaction has been very positive. The data is impressive in that the magnitude of the response to the vaccine is of the same magnitude as the body’s immune response caused by a natural coronavirus infection.
It is conceivable that the Moderna news along with more potential good news regarding vaccines from the likes of Pfizer PFE, Johnson & Johnson JNJ, Novavax NVAX and Inovio Pharmaceuticals INO, -0.71% and good news on antivirals such as from Sorrento Therapeutics SRNE may cause a second leg of the short squeeze to start.
More broadly, the economy is opening up but there is significant uncertainty about how consumers will respond. The trillions of dollars in fiscal stimulus is helping, but stock investors should also be concerned about massive budget deficits and borrowing. The Federal Reserve is increasing the money supply like there is no tomorrow, but there are consequences to a bloated central-bank balance sheet. There is optimism about antivirals and vaccines but there are no guarantees.
Shouldn’t the stock market be taking into account the damage that has already been done to the economy? The answer is the market always looks forward.
Chart
Please click here for an annotated chart of Dow Jones Industrial Average ETF DIA.
Note the following:
• The monthly chart shows that the stock market touched the upper band of the “mother of support zones” and then bounced to the bottom band of the resistance zone….Read more at MarketWatch.
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