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One would think that a 28% rally in the S&P 500 would be driven primarily by fundamentals and underlying stock strength, but analyzing the data tells a very different story. Of the 32 days in this rally 5 of those days make up 83% of the move. Those 5 days all came before March 23rd.   If you bought into the rally after the PPIP announcement on March 23rd you’re essentially flat.  In essence, if you didn’t buy into this rally within the first two weeks your gains are meager.

Even more eye opening is the incredible government coordination in managing the rally.  I initially bought on Monday the 9th in anticpation of the M2M change, but I never could have imagined the 8 weeks of coordination we were about to see.

The rally started on the March 10th pre-announcements that Citi, BAC and JPM would all be profitable.  We now know that is primarily due to accounting changes and AIG trading (“fixed income trading” as the banks prefer to call it) and that Citi still managed to lose money.

The bank rally continued on March 11th as Citi and B of A told investors they would not need to raise capital.  Of course, we now know that was a blatant lie.

The two day Fed meeting on March 17th and 18th provided another big boost to the market when Bernanke announced he would drive down mortgage rates by directly intervening in treasury market purchases.  10 year treasuries are up 0.5% since the announcement.

Hands down, the largest move (25% of the total bull move) came on March 23rd when Geithner announced his PPIP.   We have yet to see whether the PPIP will be effective, but the early outlook is not good.  The banks have ZERO incentive to sell these assets unless they are forced to do so by the government.

Anticipation of the M2M change provided the next boost to the market on April 2nd.  Anyone with a basic understanding of accounting knows that the M2M change does not actually change the value of the underlying assets or their future cash flows.  It simply allows banks to avoid admitting that these assets are non-performing.

The final big move in the rally came when WFC pre-announced their earnings results.  Of course, we all know the WFC results have the same holes that the other bank earnings had.  They are not only unsustainable, but don’t represent the weakness of the underlying assets.


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The one constant during all of this is that short sellers have been on the run since March 9th.  The banks and the government have assaulted the shorts with “good news” that has actually proved to be meaningless.  The rally is not moving up on fundamental improvement as many would have you believe, but rather it is moving up on constant short covering due to a well orchestrated government run rally.  The government has one more short squeeze left.  Will the stress test results surprise the shorts again or will the market fizzle as it realizes the government has run out bullets?   We’ll find out on May 4th.

  1. CreditTrader

    Very nicely done! Gonna do the same thing for the credit markets – great stuff!

  2. FDO15

    this is a great analysis TPC. Is there any portion of this rally that was due to real fundamental reasons or is the whole thing just short covering and anticipation of government intervention?

  3. Cullen Roche

    I think it’s definitely safe to say that the vast majority of this rally has been due to short covering and anticipation of government actions as opposed to fundamental strength in the economy….

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