Today’s Short Squeeze Could be a “Dead Cat Bounce”

Stocks roared higher today after posting solid gains in the trading session prior. The tech-heavy Nasdaq Composite led the way (+2.95%) while the Dow trailed behind (+1.50%). The S&P split the difference, rising over 2% through noon.

It’s a huge shift in momentum following a rough stretch of trading that began back in late November, which only got worse after the Covid Omicron variant was discovered.

But over the last two days, the conversation has changed completely. Doctors familiar with the strain say that it’s far more infectious but less lethal than other variants.

Many analysts now believe that additional lockdowns could be avoided as a result.

“The market certainly — and this morning is another indication — is kind of looking past the [Omicron] variant as something that’s going to be slowing down economic activity, but we’re still not completely out of the pandemic,” said Goldman Sachs CEO David Solomon this morning.

Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, agreed with Solomon’s take.

“There tends to be, especially with Covid, a lot of knee jerk reactions,” she explained.

“People react before they even know what the what the variant is, how transmissible it is or where the vaccines can help against it […] It looks like Omicron isn’t going to cause more of these global types of lockdowns or shutdowns that some were thinking might happen.”

Pfizer (NYSE: PFE) CEO Albert Bourla, on the other hand, said Omicron could potentially be a major obstacle. Even worse, Bourla warned that it may lead to additional mutations.

“I don’t think it’s good news to have something that spreads fast,” Bourla remarked.

“Spreads fast means it will be in billions of people and another mutation may come. You don’t want that.”

Pfizer, of course, has a vested interest in playing up Covid fears. Their vaccine is by far the most popular choice worldwide. If Covid goes away, so too does a newfound Pfizer “cash cow” that the company was hoping would provide a long-term stream of additional revenue.

Bourla would never admit it, but Covid is big business for Pfizer. Especially if it continues to mutate, prompting new government mandates that force people to take boosters each year, if not multiple times per year, for decades to come.

However, today’s major equity surge likely has less to do with Omicron and more to do with a “short squeeze” that began early this morning. Goldman analysts observed that, over the last two weeks, the market endured its “largest 10-day net selling in US equities since Apr ’20 led by Macro Products as well as Info Tech/Consumer Disc stocks” before adding that “North America and to a lesser extent EM regions were the most net sold, while DM Asia was net bought driven by short covers.”

In plain English, that means the majority of the recent dip was driven by short sales, which outpaced long sales 9-to-1. US equities were net sold 7 out of the last 10 days, hitting a level unseen since April 2020 following the early stages of the Covid pandemic.

Today, short-sellers began to cover their shorts en masse, leading to a major run higher at the open as shorts quickly liquidated.

And while that’s good news for dip-buyers, it also calls into question whether stocks will continue to rise or if the shorts will simply put on new bearish positions tomorrow. If the S&P’s going to confirm another rally, it will have to trade above today’s high in the coming days to do so.

If it doesn’t, expect another run lower as “smart money” shorts pile back in and retail traders are left holding the bag.


Please enter your comment!
Please enter your name here