Rosenberg's Explanation For Recent Market Surge: Liquidity Pump And Short Covering

Tyler Durden's picture

It seems everyone is perplexed by the most recent irrational bout of July market action. Like clockwork, once July rolls in, the market surges, no questions asked. This year, the ramp is particularly blatant because as the attached chart demonstrates, bonds, which are a far more credible barometer of market (in)sanity, indicate the S&P is rich by at about 50 points. As this spread will most certainly converge eventually as we discussed previously, a short stock, short bond position would generate some much needed P&L in this world of deranged fractal algorithms. As to what may have caused the most recent bout of irrational exuberance, David Rosenberg has the most logical, and generic solution: excess liquidity and a short covering spree, and "nothing fundamental here."

From Breakfast with Dave


We’ve been asked repeatedly how the stock market has managed to bounce off the nearby lows with such veracity. Especially with the ongoing weakness we have seen in the incoming U.S. economic data due to the fact that the retail investor still refuses to participate and is solely focused on income-generating strategies. The answer is that the market may have been on the receiving end of another few jolts of liquidity. M2 money supply has expanded $38.5 million in the past two weeks and the M1 money multiple has risen from 0.839 to 0.862.

When we go to the weekly data from the Fed, we see that “trading assets” on commercial bank balance sheets expanded to $325 billion in the past two weeks from $297 billion. And, when we go to the Commitment of Traders report, we see that there has been a big swing in the net speculation position on the S&P 500 “E-minis” on the Mercantile Exchange (futures and options) to a net long position of 28,172 contracts from 15,155 net shorts just two weeks ago. That’s a big part of the bounce-back — prop traders and short-coverings. Nothing fundamental here, as far as we can see.


  • Last week’s 5.4% increase was the best performance since mid-July 2009 (week of July 17th). But yet, prior to last week, the S&P 500 saw the largest decline (-5% during the week of July 2nd) in eight weeks, and it was down two-weeks to boot (July 2nd and June 25th weeks).
  • Last week also saw three days of positive performance, a streak we last saw in mid-April of this year. However, prior to those three positive sessions, the S&P 500 was down five trading days in a row.
  • Last week’s increase also comes in the heels of declines in June and May, which was the worst back-to-back decline since January and February 2009
  • In Q2, we saw the worst quarter (-12%) since Q4 2008 and before that, Q3 2002. In fact, going back to 1946, a decline in the quarter of 12% or more is only a 1 in 20 event (we have only seen 12 quarters of 12%+ declines in the past 64 years).
  • For the first half of the year, we have seen three up months (February, March, April) and three down months (January, May, June).
  • The 80% increase in the stock market that we saw from March 2009 to April 2010 is the largest increase in such a short period of time since the period of May 1935 to April 1936.

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Sudden Debt's picture

Tyler, a rising market isn't a bad thing you know.

If it goes up = good

If it goes down = bad (unless I'm shorting it)


Slash's picture

rising market based on manipulation and short term technical nonsense =/= good

Mr Lennon Hendrix's picture

And what is your metric?



unwashedmass's picture


refresh my memory, what time do we buy the AUD/JPY to ride the train in the last half hour?

unwashedmass's picture


refresh my memory, what time do we buy the AUD/JPY to ride the train in the last half hour?

ThinkAVP's picture

Marc Faber U.S. bonds worthless confetti

Marc Faber does expect a Banking crisis for this year but in the next five to ten years ..."you see we had a financial crisis basically the financial system went bust , but it was bailed out by the government , the next time when the train stops is when the government goes bankrupt
Chemba's picture

Marc Faber also believes SPX will go to 10,000 when Banana Ben goes into hyper-printing mode.

equity_momo's picture

What does that price gold at , 10k? Im using a simple 1:1 correlation which is incredibly unfair to gold - if i use behavioural finance as a guide  - which is far more important - then gold is literally going to go off the hook.

Vampyroteuthis infernalis's picture

More proof Skynet is running the show.

ABeautifulMind's picture

Skynet is set to resume its accent with the reappearance of 0's ans 1's.  Downward stop was 1010.  Next stop, 1110.

Watch out for the cliff.

scatterbrains's picture

I'm not so sure..  with everything manipulated by the fed with unfathomable deep pockets I'm thinking they sell a few long end to raise the cash to buy the spy/es or if they want sell spy/es buy some long end..  inhale the market screams higher, they exhale the market dumps hard.

Mr Lennon Hendrix's picture

"Whats driving the market?"

PRECUIOUS METALS!  COME ON ALREADY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

The excess lquidy is being soaked up by PMs.  This by me and China.  Get some.

The doelarr devalues, and equities have an inverse relationship.  Have you forgotten?

Bank's trading assets are expanding, and what is the whole scheme based around?  You know what it is!  Gold, bitches!

"JUST CALL IT A WHOLE LOT OF VOLATILITY"..or as I like to say, Capitulation.  Call it what you want, I guess, but I like my term better.

Whizbang's picture

Dollar isn't devaluing anytime soon friend. It's gonna be in the eighties for a while. Until china earnestly breaks it's peg on the dollar there is no point in devaluing our currency.

Bankster T Cubed's picture

50 points?   please.....

the whole market is an absurdity and he's implying that there exists some sort of investor impact on prices?   HA!  no

it's all a fraud now.   all of it.

ThinkAVP's picture

I agree, All fraud on a large scale nothing more to do than continue on with it..

firstdivision's picture

Question of the day is that can the SPX break the 50DMA on light volume? 

NOTW777's picture

it is nice for trading

MrTrader's picture

Expect S&P 500 to close at 1078, after all suckers are caught into longs and happy call buying spree. Meanwhile more than a dozen macro indicators are forecasting a sharp slodown in Q3. Buy T Bonds and sell stock indices. Massive GDP revisions coming. Happy trading.

Mr Lennon Hendrix's picture

Massive GDP revisions and you say to invest in Treasuries?  Whaaaaa?

This is a CORPERATE TAKEOVER, bitchez!

mephisto's picture

You'd expect some sort of covering before retail sales. No data for 2 days, market up 2%. Some will take their money off the table. Let's see.

dussasr's picture

How could the market not go up when everyone is so bearish?  When the last seller has sold there are only buyers left and prices will go up...

Boilermaker's picture

Damn...and all this time I thought every trade had a buy and a seller.  But, you're actually saying their are only buyers.  That's freaky shit, man.  I would have though that abhorrent volumes and no seller meant that the market was a like a fucking void of disinterest.

So, I guess, when a store is completely empty, that means that all the people that aren't interested in buying something are gone so the people wanting to buy something will surely be crashing the gates.

What the fuck kind of backward and simplistic shit is this?

<forward apology if you were being which case, well played>

wiskeyrunner's picture

There has been little to no economic data, perfect time to jam up the overnight session in the futures, it's like magic!

Boilermaker's picture

Well, I went to bed at around midnight EST and the DOW futures were -7.  I woke up, took a shit, grabbed a cup of joe, clicked on the tube and they were +70. 

I went back and had round two of my shit unsurprised by what I had just seen.

Abiggs's picture

Please think/check before you comment - ES and corresponding carry trades were down during the Asian session only to get lifted during the European session, mimicking Sun/Mon's activity... The major difference was today's Grecian 2-year bond auction which was relatively successful (closing at under IMF's rate, bought by 9 private banks).

The main driver of today's ridiculous stock market action - currency moves, specifically EUR/USD and DX activity - AUD/JPY is a worthless indicator. It has been diverging for the last two days after failing to breach 78 while ES is rocketing upwards...


ATG's picture

Dear Dave has been wrong on stocks for 17 months now.

Maybe he will finally be right today with the news on Venezuela...

DavidC's picture

I'm not quite as bad, I've only been wrong for the last year...

All time historic low interest rates, U6 unemployment very bad, 'Extend and Pretend', real estate foreclosures still looking very bad, etc etc. This is not a recovery.


vidman32's picture

Anyone else notice that the start of each new quater leads to the markets going up for about 15 days?  My bet is that we have a top in 2 days.

The Franchise's picture

Market up = doesn't matter

Market down = doesn't matter

Trees = market's strange and manipulated moves

Forest = equity markets are irrelevant

Tic tock's picture

Ten minutes after Treasuries are auctioned off, a portion go onto Bank capital reserves and a portion go into market-wide, sort-of, buying sprees.. as long as the Government keeps spending, the Stock market goes up. Look, pensions get saved this way..!! please, we're doing good for everyone.. who's invested in the market. The rest don't matter, there's a separate government for them, somewhere around here, someone was saying...seriously they've got their own courts and enterainment.

Crap, why not just keep the dollar for banks, M3, international trade and assorted curiosities; and hae a meaningful economy for the real-economy employed? I dunno, maybe Gold-based.

Boilermaker's picture

Holy fucking shit...

LOOK at the IYR 5 day chart...Yea...right...unreal

Mr Lennon Hendrix's picture


It is at the top of its trendline from the beginning of April.

Take profits now.

Boilermaker's picture

I think the point might have been missed.

the grateful unemployed's picture

wall street isn't rocket science, not this time. the EU is not imploding, the leak in the ocean will be resolved sooner or later, the bad news is out, sentiment is oversold. Political gridlock is back rhymes with goldilocks like in the economy. fundamentals are not good, they're not bad either, or they may have bottomed. the retail investors, the chumps are deer in the headlights, and low volume is the weapon of the bull.

remember how it works, you revalue assets, on thin volume, then you leverage those paper gains out, into wealth effects, people draw that money out of their 401K and they buy expensive dinners, stay in lavish hotels, travel, and that supports the service industry, which bootstraps the whole thing higher.


if only Ben could just declare DOW 36K by fiat. I Ben Bernanke declare the Dow Jones Industrial Average to be 36000, this first day of January, 2011. short of that kind of authority, he can do what he has been doing, seeing the traders have enough excess cash to run the market higher and no fancy regulations to keep them from crushing the shorts.


This particular rally is all about sentiment and the dearth of stock vigilantes, who sell the rally as soon the chumps catch on.

Slash's picture

so hang onto my SH from yesterday? or hedge it....

the grateful unemployed's picture

took off the double bull levered play and buy it back in a day or two if the action suits, we are at the 200 ma on the DJIA, and the 50ma is nearly 100 pts below the 200ma. best bull case a midday drop below the 50ma and close at or above to give us the hammer. 1300 SP is my bullish objective. 

DMA Trader's picture

all the rally from 09 march to today  was on light volume. 

since when is volume a thing to care on trying to make money. 

just ignore it. 

pure price action.

who cares if the rally is on light or huge volume

price is what we pay.

Mr Lennon Hendrix's picture

Price is fixed.  Until it isn't.....

Move along.....

ATG's picture

Maybe all those ships and Marines by Costa Rica are getting ready for a hat trick with Iran and Venezuela the same moonless night...

Mr Lennon Hendrix's picture

Some advice; do not use google today from your home computer ;)

traderjoe's picture

Poor small business survey, record monthly budget deficit, higher trade deficit, CSX down almost 3%, AA up small (both as catalysts for the "earnings driven rally), Portugal downgrade, relatively weak bond auction, etc. - rally 'em 150 points! Was there a good data point that I missed today?

It just doesn't matter what we think. There's an agenda, and unlimited money behind it. Just wonder if/how/when it will ever stop...

Abiggs's picture

"relatively weak bond auction" - I hope you're not referring to the Greek auction because that is about the best auction/news they have had all year - did you miss the eur/usd confirmation that followed?

FYI and I am not bullish by any stretch of the imagination but come on, Greece achieved a lower rate than the IMF rate...

PicassoInActions's picture

We need to send all bankers to china, line them up around the great chiness wall and order a firing squat to proceed.


bruiserND's picture

Fundamentals follow the technicals.

At what point does ZH trade both the Bull side as well as the Bear side of the equation ?

For 2 solid years all you point to is how the game is rigged and Armageddon is the only thing on the horizon.

Are you at all capable of acknowledging a Bullish argument under any circumstances?


Turd Ferguson's picture

Perhaps, for our enjoyment, you wouldn't mind stating the "bullish argument"?


Iam Rich's picture

Thinking the same thing, just pondering the wording...but I think turd says it all.  However, for my sake, just the very bestest super bullish argument that will be obvious even to me.