It’s days like Thursday that make the bull market feel invincible. Although even a super-sensitive lab instrument could not have detected a mote of buying enthusiasm, stocks nevertheless were able to tread water all day and close essentially unchanged. They seem capable of vamping indefinitely while waiting for some ‘news’ to trigger a short-covering panic. Factor out vaguely dovish cryptoblather from the Fed and minutely bullish emanations concerning the tariff war, and the Dow would be trading 5000 points lower.
What most amazes is that when stocks drop because trade tensions are perceived as rising, they regain all of the lost ground and then some when tensions return to normal. This dynamic demonstrates the power of short-covering, a source of buying so urgent and desperate that it invariably outdoes whatever selling has preceded it. The reverse will be true in a bear market — i.e., the selling will tend to get overdone, while rallies, however violent, will be limited in scope. And just as violent swoons in a bull market serve to keep bulls from making money too easily, fleeting bear rallies will keep shorts from getting comfortable betting on what would otherwise seem like a sure thing.