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Street’s Hog-Trading Game Has Hit a Wall

By Rick Ackerman Posted on January 25, 2010, 4:12 am EST Last Updated January 25, 2010, 7:05 am EST

Wall Street seems to have caught more than a whiff of the Great Recession last week. More like the scent of a corpse, notwithstanding the full court press by Government and news media to convince us there’s a recovery going on.  The insane energy that had been pushing stocks higher since last March now seems to be failing. Notice in the chart below how the Nasdaq index has suffered two sharp setbacks since November. There is nothing bearish about this per se, since all uptrends need to correct now and then. However, it is

Since-July2

the price action that followed the breaks that raises doubts about the veracity of the ten-month-old bear rally. The thrusts were noticeably tepid compared to the spectacular surge that lifted stocks from a funk in July, taking the broad averages to new recovery highs.  

 What this suggests is that short-covering, the main source of power for bear and bull rallies alike, is running out of fuel. And it’s not because shorts are so certain about the economy’s death spiral than they can no longer be spooked. More likely is that they have simply left the game in order to survive. To be sure, even a relative handful of panicky shorts can goose stocks sharply higher on a given day, and there are probably still enough of them around to levitate the Dow by 150 points on whatever faintly encouraging speck of bullish news crosses the tape.  

Margin Calls

Such buying is driven by margin calls and feeds on itself, and that is why it is far more potent than merely bullish buying, able to push stocks through resistance levels. But the take-no-prisoners rallies of summer have given way to a wafting uptrend that has ceased to spook bears or much impress the public. The market’s tepid ascent reminds one of the story about the two hog farmers who conspired to trade pigs back and forth to raise the price of pork. That’s what institutional traders have been doing since spring, even as individual investors have completely deserted the market. With last week’s slide in the broad averages, evidence grows that, for Wall Street’s “hog farmers,” the game may be over.

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  • Randy January 26, 2010, 12:05 am

    You mentioned DXY in this mornings e-letter, but when I tried to look it up on Scottrade, it has no stock or etf for that symbol. If it is a futures symbol would you please send me a corresponding stock or etf that I could substitute for it incase you recommend a trade.

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    I don’t use DXY as a trading vehicle, Randy, just as a frame of reference for currencies and gold. $DXY is Tradestation’s symbol for NYBOT’s cash dollar index. The March futures contract is DXH10. RA

  • Tom UK January 25, 2010, 1:08 pm

    Rick, you and your readers may be interested in this comprehensive demolition of Ben Bernanke’s theories from the laconic Aussie deflationist Steve Keen: http://www.debtdeflation.com/blogs/2010/01/24/debtwatch-no-42-the-economic-case-against-bernanke/

  • Keith January 25, 2010, 6:27 am

    Pardon if my question is lame but my understanding is that a mere 3% of stock trading volume is actual short selling?? If so, then how can the shorts push stocks relentlessly higher? It doesn’t seem to me like that would create enough buying (short covering) to push the market as high as it has.

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    In the almost complete absence of serious selling, it doesn’t take much volume to keep stock buoyant. The fact that 80% of the bear rally’s gains have occurred after-hours in relatively thin index-futures trading has made the effect all the more potent. RA


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