David Rosenberg On Market Capitulation And How This Short Covering Squeeze Will Play Out

Tyler Durden's picture

In light of continuing deterioration in macroeconomic data (we don't remember when the last time was that we had a materially better "than expected" data point) many are left wondering how it is possible, that when seeing broad signs of capitulation even among the permabullish contingent, the market has resumed its ceaseless levitation. Simple - as David Rosenberg recaps our post from two days ago, "Short interest on the NYSE and Nasdaq surged nearly 4% in the second half of August; these positions are now being squeezed, which is the "buying" support" the market has been experiencing in the low-volume rally of the past few sessions." Indeed, as long as the weakest hands who piled on the shorts into the latest market plunge are not cleared out, the current episode of no-volume levitation will continue. Sprinkle one or two favorable headlines which sends the robots into a frenzied bullish bias churn, and one can see why it may be time to whip out Birinyi's ruler.

From Rosie:


  • The USA Today consensus showed that strategists have cut their year-end S&P 500 targets by 8%.
  • Wall Street economists are at 40% recession odds, which means if the heads of research allowed them to really say what the probability was it would be 80%.
  • Bank of America let its chief equity strategist go who was calling for 1,450
  • on the S&P 500 and the most bullish seer out there (we wish him well).
  • The AAII investor sentiment survey shows 30.2% bulls and 40.3% bears.
  • The Investors Intelligence survey also did a switcheroo, with the bull camp in the past week down 3.2 percentage points to 35.5% and the bear share rising the same amount to 40.9%. That is the largest number of bears since March 2009 (was 21.5% at the July market peak). And we have the fewest bulls since the August 2010 retest of the lows back then. The "spread" is now -5.4% between the bulls and bears, well off the +28% gap at the July market peak.
  • Short interest on the NYSE and Nasdaq surged nearly 4% in the second half of August; these positions are now being squeezed, which is the "buying" support" the market has been experiencing in the low-volume rally of the past few sessions.

Remember, it is not at all unusual to see the stock market enjoy a relief rally after the initial 20% leg down in a cyclical bear market. For example:

  • The S&P 500 peaked on September 1, 2000 at 1,520. By April 4 of 2001 — the economy at this point is more than a month into recession — it hit an interim low of 1,103. Then even with a very poor economy, the news became less bad, the shorts covered, and the S&P 500 zoomed ahead to 1,312 by May 21st. That was a 19% surge despite the economy moving deeper into recession.
  • How can that be? Well, that's how the market works — backing and filling. But the right strategy was to continue to adopt a recession view until the data told you to abandon that view and to sell into that strength. By September 7th, two days before the 9-11 terrorist attacks, the S&P 500 had broken to new cycle lows of 1,085 (and didn't hit the ultimate low of 776 until October 9, 2002).
  • It was the same deal in the last cycle. The S&P 500 peaked at 1,565 on October 9, 2007 and then endured a big initial leg down to 1,273 by March 10th — when Bear Stearns went bust. Then, after a series of Fed rate cuts and a huge tax rebate from Washington, that's all it took to scare the shorts and took the S&P 500 all the way up to 1,426 by May 19th for a nice 12% bear market rally. By the end of July we were back below 1,250 and that was before Fannie and Freddie had to be taken over explicitly by the government ... and we know what happened after that. Indeed there were plenty more peaks and valleys before the trough was finally turned in (in March 2009).
  • We had this similar pattern in the early 80's as well — the S&P 500 went from 140.4 on November 20th, 1980 to 112.8 as of September 25th, 1981 — that first 20% leg down — to only then get a relief technical rally from oversold levels to 126.3 by December 4th, 1981. That got a whole lot of traders excited but the long-only crowd got decimated unless they got out at these better price levels because the S&P 500 ultimately went all the way down in the last down leg to 102 by August 1982.
  • Moreover, back in the mid-70s bear market, much of the same. The S&P 500 slid from January 11th, 1973 from 120.2 to 100.5 as of August 22nd, 1973 so we had that first 16% drop. That was followed by a nice rally back to 111.4 by October 26th, 1973. The trough, however, was 65 at the lows in December 1974.
  • In all cases, that first rally following the initial leg down reversed half of the initial selloff. That is exactly what is happening right now. Tread cautiously if you are tempted to jump in. In other words, even with the bounce off the early August lows, this cyclical bear market is following a very similar path.

Source: Gluskin Sheff

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redpill's picture

I think I'll just pull a Adoboli and massively short something entirely at random.

Godisanhftbot's picture

 you have a better chance shorting at random, if you short based on rationality, they will target you for sure.

Smiddywesson's picture

Absolutely!  Anything, even a Holy Grail system, that puts you on the side of the trade where retail is clustered, is bound to lose in the long run.  The only thing that works in "markets" that are not markets, but are in reality manipulated abominations, is understanding the scam and avoiding the targets of that scam.

If anyone tries to sell you anthing that doesn't factor this reality into the system, run away.

IQ 145's picture

For the tenth time now; you don't short rallies in markets coming off bottoms. And you don't short anything because of gloomy conversation on an inernet blog; S&P 500 breaking above 1200 as predicted here yesterday. Do not Short anything. This is a rally. Oh, and by the way, the author doesn't know shit.

MarkS's picture

Sure, of course you know it's a bottom how?  Is it a bottom like the bottoms in Feb, June, and Oct '08?

So far is is a rangebound trade between 1100-1225 maybe after we get a few closes outside the range we'll know for sure.

The author does know shit.  He knows economics, which doesn't make him a good trader or even a good investor necessarily.


So, is your IQ really 145?  I feel so sorry for you, mines so much higher...

HD's picture

Who said it was the bottom?

Tater Salad's picture

IQ, you forgot these around your number (***)


There, looks better doesn't it.

MiguelitoRaton's picture

IQ 145? I'm assuming that is the cumulative number for you, your wife and 4 kids.

Savyindallas's picture

And we're supposed to trust you because you claim to have an IQ of 145? Tell me smart guy - S@P at 1208- at what point do YOU short?

SilverRhino's picture

The scary thing is that he supposedly had monetary access capable of even generating a 2B dollar loss.


TzaristBondHolder's picture

someone was BUYING at random -  BNP is up .....

Corn1945's picture

I think it's wise to stay out of this casino altogether.

mac768's picture

... now we just happen to be at the level of bears close to the 2009 low

what happens next?

... the casino is open for the risk-takers..

Corn1945's picture

I don't understand why the market moves up or down anymore. I'm just guessing and am quite sure everyone else is also. The market no longer has a connection to the real economic fundamentals which makes "investing" akin to coin flipping. There is far too much manipulation and intervention to use it as a price discovery mechanism.

Money is too hard to come by to risk it in a casino-like environment. I would only buy stocks at a level near the March 2009 lows. Dividend yields are way too low to risk capital to chase yield. The risk-reward calculation doesn't come out in my favor.


Edit: Here is a headline I just saw "Bulls Brush Off Weak U.S. Data"

Uh, okay. Why are you buying shares in a company if you are just going to ignore the data? The entire thing makes absolutely no sense.

slewie the pi-rat's picture

hey, c_45!

Money is too hard to come by to risk it in a casino-like environment. 

yezZeree: esp in a recession/correction/depression! 

i agree and "traders" who keep large sums in the casinos may be facing cerain "counterparty risks" if/when the global goobermints' credit bubble makes a certain tell-tale sound.  we have seen the co-ordination of the int'l bankster cabal, there past 2 days simply b/c da playaz had to reveal their "colluding" in order to stabiliZe the EU and keep china's political leadership credible and also involved

i wonder what r.paul will say to the benzelbub @ their next "hearing"? 

i think we have QEIII, here, don't we? but as "smaller" US-side banks do the "swaps of $$$ for fecal matter" and american juice is transferred, openly and wholesale, to the NWO europeon masters and their puppets.  this is inflationary as heck, too, boy!  unless, of course, the expanding whirlpool of deflationary collapse just disappears our wealth via the pigpeople and their adorable piglet puppet nations which need "austerity" like a fuking hole in the head, but the idea that goobermints can balance budgets and just cut the pork & fat and govern apparently belongs to a future paradigm shift, b/c the idea has little traction, even on this site, where bloggers are actually quite heavily conditioned, politically, in diff ways, and ready to do actual violence to anybody who scratches their surface a bit and shows them for the robotic, untinking foolz they be

the economic "glitch" between austerity being the only legal remedy and being not the right 'economic' remedy for the keynesians is now being "addressed" but as nancy pelosi will sure appreciate, time is of the essence, so let's just cut the discussion and git 'er done for the puppet-masters, here, dammit!

the bullion banksters stand ready to buy all the PMs and paper PMs you wanna unload, here, of course, even tho they may be much more interested in "painting" our two majestic phyZical horses as "breaking" down outa certain channels and trends, here, technically.  that is what they do, and we are looking at how they do it in real time.  this is, perhaps, why most "technical calls" esp re the miners have fared so poorly over the last few years

again, i'm with you, not so much due to the nature of the casino (compulsive gambling from home in a socially-acceptable way for the OCD types who will, eventually, lose everything, as always) as due to the zombie/insolvent status of many of the "trusted" brokerages and/or their retail/commercial/bullion/venture&LBO banking and insurance branches.  please read your prospectus if you are a "trader" ok?

as we progress thru this insanity, cashing out or buying/owning PMs may become more & more "regulated"  so each person should think and act individually and prudently, depending on understanding and intuition

"protection" is paramount for slewie, too.  i gamble, but in casinos and online poker clubs and it's all cash, and a ton of fun w/ some great people

"price discovery" will only happen when the bubble du jour ('sovereign" debt) makes that tell-tale sound, which may have been temporarily averted in the EU long enuf for the "legislating" and political "majorities" to get the bonds and their reception (by china) up to speed, even as the cabal has gone public w/ their collusion and manipulation of everything monetary and "economic" (think hundreds, at least, of centrally co-ordinated PPTs for a fun few minutes!)...

...so that "investors" will have more confidence, no less!  which is really, terribly funny, isn't it?

Panafrican Funktron Robot's picture

Actually, it does.  Once you accept that the stock market and broader macroeconomic data are uncorrelated, you can ignore that noise and focus on how it actually moves, and profit accordingly. 

TzaristBondHolder's picture

not casino, a theatre.  In a casino you gamble knowing the house rules, here they change games and rules WHILE you are trying to place bets

anynonmous's picture

Rosie, which is it?  the seventies  or the thirites

kito's picture

sign outside of fort knox now reads "we sell gold"

InconvenientCounterParty's picture

that makes sense.

Why else would gold tank on the announcement of more debt creation and announcement of currency intervention?

It should be no surprise that gold is the "go to" asset when fiat fails. Selling and buying sounds like a real market.

moonstears's picture

Saw it, too...but said "we BUY gold" (for the FED's stash, guarded by the US Army, thanks to FDR!), as I recall.

kito's picture

no moonstears, you dont have this massive drop in gold when such bullish gold news comes out unless the fed and other cohorts are dumping into the market to prevent a run to the ultimate safe haven. they are dumping gold, pumping fiat into this news to keep fiat in the banking system.... 

Shell Game's picture

'they are selling gold'  Which? There are two gold markets, one they sell and one they vault. 

moonstears's picture

Kito, my idea was to shed light on a possible theory, I've read, concerning WHO owns the gold in Knox. I believe that the hedges, individuals, etc are selling, FED/ CBs not so much. JMOs.

Toma Haja's picture

My suggestion is that the drop in gold is the result of the inverse of Rosie's article on the short squeeze.  The institutional holders of gold are shorting it in order to buy it on the cheap. 

tiger7905's picture

Dylan Grice talking $10,000/oz gold, the idea of very high gold prices going mainstream...


Tuco Benedicto Pacifico Juan Maria Ramirez's picture

In very small print below main verbiage:  "if we had any":)

macfly's picture

I'm holding steady short, but wish I'd got in at these levels!

DirtMerchant's picture

The house ALWAYS wins...better to spend your money elsewhere, more enjoyment, less frustration...

BE the house, stay physical my friends!

Smiddywesson's picture

Excellent point. 

Physical will be the eventual winner. 

Physical has no counter party risk. 

You can't trade physical because it's, well, so physical.  Therefore, it's hard to scam you out of your position. 

Physical has no calories and keeps you in shape with all that digging.  After all, the #1 rule with respect to a zombie apocalypse is "cardio."

Bendromeda Strain's picture

Meh - bad joints, can't run. Which means Rule #2 is all important...  DOUBLE TAP!


xtop23's picture

Its all well and good to look at past precedent but the game is different this time. You follow the rules learned from previous trends at your peril.

RockyRacoon's picture

I was just thinking the same thing.   All references to "past performance" are irrelevant.   The 1980s is certainly no clue to today's actions in the markets.   Maybe go back to the 1930s for some more relevant parallels.

HedgeFun's picture

Love Rosie.  Clear thinking.

Belarus's picture

Last September the market rallied 8%. So far, the market is still trying to recover losses for Sept. By the end of the montth, September will likely be another fantastic month. 

Remember, the market alwasy does what it supposed to do, just NEVER when it supposed to do it. If the NYSE short interest didn't scare the shit out of you, I don't know what would.

The market will indeed crash....but first it must fuck every soul alive. 

DirtMerchant's picture

if the market crashes and nobody is in it,  does it make a sound?

xtop23's picture

 The sound of HFT computers having an orgy should make for quite the auditory assault

Smiddywesson's picture

The markets are designed to hurt the most people most of the time.

Bernard Baruch

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Good posts Belarus.  Words of wisdom.  Sometimes "stand aside" is the wise option!

Zola's picture

Short interest does not mean anything bullish, it is quite the opposite in a real market actually, high short interest means smart money is anticipating a decline and it is a bearish signal. Only in this casino where Shorts are specifically targeted by the ones who see the positions does that have the opposite effect. Finally you should check the short as a % of issues , when you have whales like Biggs who will puke massive amounts , a low short interest does not mean anything. The market has become deeply corrupted and gold is at this point the only answer.

Hugh_Jorgan's picture

Don't forget that there are two Gold markets, and the price is based on the Ponzi paper market.

I LIKE to think that that this price drop is a combination of profit taking (after another significant upshot wasn't realized in the past week) and the shrewdest investors unloading paper gold in a coordinated effort. This motive is to drive the price way down in an effort to allow them to buy back into physical, but we'll never know.

Whatever happens, this move is very temporary. Price will resume it's rise before long.

buzzsaw99's picture

What a crock of shit. Time to go long.

Belarus's picture

Don't, you simply don't know when the market is going to fuck you. When you don't know what cards are in the deck, you're a sucker to play. Don't play--it will treat you no different than Vegas, the longer you play the more you'll lose.

I'm barbelled right now: USD (I know, I know) and precious metals. Almost none in any bank or brokerage. 

Belarus's picture

BTW, I'm following the late Benjamin Graham's advice on asset allocation. I'm 50-50 between cash and precious metals. Every time cash goes up to 55% because of precious metals tanking, I re-allocate back to 50-50. However, I never re-allocate from PM back to cash.....

Therefore, I'm 80% in PM's and only 20% in cash. ROFLMAO. Meanwhile, I'll wear the Dow 11,300 2000 hats for all the sheep. Oh.....wait, it's 2011!

IQ 145's picture

I guess this is a good place to remind you that I've told you over and over again that the huge short interest means the market is going up; and that I posted here yesterday, that I bought the S&P500 at 1182.7; so that's $5000 overnight and up ticking; also I posted why I did it and asked you to look at the S&P500 chart; attempting to teach. It's not my fault if no one listens.

buzzsaw99's picture

TSX + 1%

GS.TO - 1%


enough said

Astute Investor's picture

so that's $5000 overnight and up ticking

What will you do with all of that money?  I guess a financially stress-free retirement is all but assured.

The Deleuzian's picture

I'm not sure contemporary comparisons shine much light on the current situation....More like the Roman Empire in fast forward a factor or three

monopoly's picture

This post makes a lot of sense to me and we are on the same track.

lunaticfringe's picture

I don't need all of those bullet points. For me, it is far simpler. I think the member banks are positioning for QE3. I think they know it's coming, and I think this market is completely detached from reality and sick. I couldn't trade this thing with tyler's genius. http://thecivillibertarian.blogspot.com/2011/09/what-hell-is-going-on-wi...