The Big Short Squeeze
The short squeeze in the stock and bond markets occurred because equity investors and traders focused on the bullish aspects of this week’s employment report and ignored warnings from the Fed Chairman that interest rates may have to stay at high levels for longer than initially expected.
The market was heavily short stocks and bonds, and a short squeeze was bound to occur. The rush to exit short positions by noise traders, discretionary traders, and CTAs using dynamic stops exacerbated panic buying.
For the week, the E-mini futures (ES) surged 238 points and the 10-year Note futures rallied 1.9 points. Note that there was another short squeeze in March of this year, but after July, stock gains evaporated, and after April, the downtrend in bonds resumed, as shown in the above weekly chart. Short squeezes occur with higher frequency in bear markets, and it is impossible to know whether they mark a bottom.
Large-cap stocks (SPY), the NASDAQ-100 (QQQ), and the Dow Jones Industrial Average (DIA) surged 5.8%, 6.5%, and 5.1%, respectively. The S&P 500 low volatility index (SPLV) ended the week up 4.2%. The S&P 500 high beta index (SPHB) jumped 7.2% due to the short squeeze, and small caps (IWM) surged 7.6%.
The 10-year note yield crashed 29 basis points to end the week at 4.56%. The TLT ETF surged 4.2% due to short-covering in the bond market. Commodities (DBC) fell 1.3%, mainly due to a 4.5% drop in crude oil (USO). The US dollar index (UUP) dropped 1.2%. Gold (GLD) ended the week down 0.7% despite the US dollar losses.
Year-to-date, tech stocks (QQQ) are up 38.7% and down 7.8% from all-time highs. Large caps (SPY) have gained 14.9% on a total return basis. Gold (GLD) is up 8.9%, and crude oil (USO) is gaining 6.8%. Commodities (DBC) are up 0.1% for the year. Low-volatility large-cap stocks are down 4.3% year-to-date, while high-beta large-cap stocks are up 9.8%.
Since last year, large caps (SPY) and tech stocks (QQQ) are down 6% and 6.5%, respectively. Small caps (IWM) are down 19.5% since last year, while bonds (TLT) are losing 37.8%. Despite the rebound in tech stocks, the market is fragile, with low-volatility stocks still in the red year to date.
