Real Reasons for Last Week's Rally Emerge
I immediately dismissed stories running rampant about a Financial Times article starting last week's rally. In Viral Nonsense About What Caused Tuesday's Rally I stated
No fewer than a half-a-dozen sites featured or repeated a silly story about Tuesday's late rally that propelled the S&P 500 up 45 points in an hour. I am commenting because of all the emails I received on the idea.
This is a case of looking for a cause and finding one.
The most likely explanation of this rally is purely technical. Support was breached, no more sellers stepped in and a short-covering rally from deeply-oversold commenced as bears covered. If you prefer, "short-term psychology changed for unattributable reasons"
It is highly doubtful this all happened because of non-statements with no details from Olli Rehn. Rather, Rehn just happened to be spouting nonsense right as the market was ready to reverse on short-covering.
It is a mistake to look for an immediate explanation for every market move. Sometimes the explanation will not come for days (then be attributed to something else), and sometimes there really is no explanation other than short-term psychology changed.
When everyone starts fishing for answers, someone will find one, no matter how silly, and the story gets repeated everywhere.
I now have strong evidence that view is correct.
Please consider the following interview on Bloomberg with Tom DeMark.
You may not be a follower of DeMark. Indeed most people probably have never heard of him. However, scores of hedge funds and institutions do follow him and do pay attention to technical levels.
Dovish Actions by Trichet
Those seeking a more fundamental reason can find it in the ECB's decision to extend more loans to banks on easy terms as noted by Bloomberg in European Central Bank Extends Loans, Bond Buys
Trichet, announcing a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign-debt crisis threatens to freeze money markets. Trichet will step down at the end of the month and be succeeded by Italy's Mario Draghi.
"The markets are a bit relieved that they're getting some support rather than no support from the ECB in the form of liquidity measures," said Kathy Lien, director of currency research at this online trading firm GFT Forex in New York.
Inquiring minds may be wondering how something announced later could have precipitated a rally sooner. The answer is leaks. Someone always knows in advance and that someone is never you or me but rather banks and hedge funds.
Two Possible Reasons for Last Week's Rally
- Dovish Actions by Trichet telegraphed in advance
- DeMark Technical levels reached then reversed
The widely circulated reason of a Financial Times rumor made little sense at the time, and now makes zero sense in retrospect. Most bloggers missed the mark by a mile and parroted silliness related to a Financial Times story that by accident came minutes before the rally started.
My friend "Pater Tenebarum" also got this correct. Please see Post Mortem of 'Turnaround Tuesday' for his interpretation.
It is a huge mistake to think reasons for something will be immediately available. Sometimes reasons only become apparent days later, sometimes not for months.
By the way, don't expect the rally to last. Nothing has been solved.