rally since july:almost entirely short covering

ASSESSING THE QUALITY OF THE EQUITY RALLY FROM JULY 2006
by Robert McHugh, Ph.D.
October 14, 2006

http://www.financialsense.com/fsu/editorials/mchugh/2006/1014.html

One of the things we do each night is evaluate the quality of each day’s price move. We want to know whether a trend is genuine, with broad-based participation, implying a longer shelf life, or whether it is the result of panic buying or selling, which suggests high risk of termination, and reversal. When directional volume, issues, and points are near, or over 90 percent, that is an indication of fear being the motivating factor for the price move, not a solid sustainable trend.

The rally since July has been almost entirely short-covering. We get one big move, about once a week, on buying panic, then no follow-up, with slightly down to sideways price action until the next week.


Get this: All of the progress of this three month summer/autumn rally, all of it, occurred in only 9 days of trading, and all but one of the nine was a short-covering rally. In other words, without intervention induced short-covering, the Dow Industrials would be exactly where they stood in mid July, at the start of this rally.

Other than those 9 trading days out of 63 since July 14th, the other 54 days of trading produced only 4 percent of the upside progress, and zero since July 19th. Zero.

There was only next-day follow-through to the upside one time, on August 16th, after a short-covering rally on the 15th, but it too showed evidence of short-covering. No days other than August 15th showed strong upside follow-through. Solid rallies see follow-through. This rally has been manufactured.

Every single time, since 1913, the Fed raised the discount rate above 6.00 percent, we have seen a substantial decline start within a year thereafter, several as much as 30 percent. That discount rate event occurred again in May 2006. We would rather this rally from July was genuine and not artificial.