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Short Squeeze Alert

X, JCP, AA

Equities tend to rally when companies with the largest Short interest outperform.

In March 2009 companies whose shares were in this spot beat the S&P 500 by 8.1% just before US stocks posted the biggest annual increase in 6 yrs. January’s advance came as the benchmark gauge was starting a 3 month, 12% advance.

And now, speculators are abandoning money losing plays that stocks with the closest links to the US economy will fall as America’s least loved shares stage the best rally in a year relative to the broader market.

The 20 stocks with the highest Short sales in the Standard & Poor’s 500 Index rose an average of 5.1% in December, compared with 0.7% for the full gauge, according to data. The performance gap is the widest since January 2012.

Companies from US Steel Corp. NYSE:X to JC Penney Co. NYSE:JCP are gaining at the expense of the defensive issues, which usually do best when the economy contracts.

Market Bulls say the capitulation underscores growing confidence in the US recovery, and Market Bears say the rally shows indiscriminate buying as earnings estimates fall close to a 1 yr low.

The change echoes money manager Laszlo Birinyi’s prediction that the 4-yr Bull Market will finally attract investors who have stayed away from equities since before the Bull Market began its Run on 9 March 2009. Mr. Birinyi call it “acceptance” as “everyone gets into the pool.”

It will be painful to be Short…

The S&P 500 rose 13% in Y 2012, adding almost $1.9-T to the value of stocks in the best increase since Y 2009. The measure has risen within 6.7% of its Y 2007 record as the US Federal Reserve tied monetary policy to unemployment and announced a 3rdround of bond purchases, while the European Central Bank pledged to buy as many securities as needed to lower borrowing costs and preserve the EUR.

US shares have risen steadily since 15 November, when US House Speaker John Boehner reported progress in budget talks with President Obama. Companies with the highest Bearish bets climbed 13.8% on average since then compared with a 8.4% return for the S&P 500.

Stocks started off Y 2013 strong as the S&P 500 rose just over 4.5% to 1,466.47 last week, the highest since December 2007. US equities had the biggest 2 day rally in a year on 31 December and 2 January as US lawmakers agreed on a plan that averted tax increases even as Obama fell short of reaching a larger deficit-reduction bargain with Republicans. Stocks extended those gains after the Labor Department said the US added 155,000 workers last month, compared with the 152,000 median estimate of 82 economists surveyed.

The market is not in a “risk-on” mode, which means Short covering of the most-shorted stocks, this is likely a good sign because it means people expect this move to continue.

Short sellers who borrow securities and sell them expecting to buy them back at a lower price provide only a temporary lift for benchmark gauges because abandoning their bets soaks up a pool of potential demand.

The risk is that if this market rally is based on Short covering and that was all it was, then there is no further money flowing in. No money, no rally, the move fades.

The US Congress must now agree to raise the federal debt ceiling as soon as mid-February to prevent a US government default. Negotiations over the borrowing threshold in Y 2011 led S&P to strip the US of its AAA credit rating and pushed US stocks down 19%, within 1% of a Bear Market.
Earnings season begins unofficially today, and estimates of how much American companies earned in Y 2012 are falling from the prediction of last October.

Combined S&P 500 profits were probably 103.40/shr, according to more than 10,000 forecasts checked on 31 December. That compares with 105.20/shr on 15 October.

Alcoa Inc. NYSE:AA, the largest US aluminum producer, is due to begin Q-4 earnings- reporting season when it releases results today.

The ratio of Bullish to Bearish investments in US equities has increased to 14.2 from a Y 2012 low of 11 in June, according to London-based Markit, which provides research on short sales and stock lending.
Americans investors missed out on almost $200-B of gains as they drained money from stocks in the past 4 yrs.

Assets in equity mutual, exchange-traded and closed-end funds rose about 85% to $5.6-T since the Bull Market began on 9 March 2009 through last September, trailing the S&P 500’s 94% surge, data compiled show.

Stocks are going to go up and I believe it to be a mistake to be too Bearish in here because the US economic improvements are real, and the Short Squeeze Signal is On.