The EPIC Short Squeeze Causing Stocks to Rally

An epic short squeeze is causing a massive stock market rally. This stock market rally has been triggered by a massive short squeeze in the bond market. Massive short selling in treasuries cause a short squeeze last week as the Federal Reserve and Treasury both announced bullish news for bonds. That short squeeze in bonds also cause a short squeeze in stocks. If you want the short squeeze explained, and you want to understand how the latest stock market news is affecting the stock market, then you need to watch this video.

An epic short squeeze is causing the stock market to rally. Yet it’s not the kind of short squeeze you’re thinking about. In fact, the short squeeze isn’t even in the stock market. Now you need to know about it, because clearly it’s having a major effect on stocks, with the stock market having its best week this entire year last week. I’m Stock Curry. I’m a former Merrill Lynch and Morgan Stanley investment banker, and I have over 25 years of trading experience. And I’ve seen these kinds of short squeezes before.

You see, the short squeeze isn’t in the stock market. It’s actually in the bond market. And this is really important because the bond market is far larger than the stock market. And whatever happens in the bond market, this affects the stock market in a big way. Over the past six months, as the Federal Reserve has continued to raise interest rates, bond yields have continued to go up higher and higher and higher, and this has had some downward pressure on the stock market. Now when bond yields go up, bond prices go down. And as bond prices go down, this caused short sellers to jump in and short the bond market in order to make more money.

Now this also has the effect of causing the stock market to go down, because as bond yields go up, the returns in the stock market appear less and less attractive. As a result, investors will very often pull their money out of the stock market in order to put it into the bond market in order to take advantage of the higher yields and returns that the bond market is currently giving. Now, as that money comes out of the stock market, it goes into the bond market. This causes stocks to fall. And as a result, we’ve also seen quite a bit of shorting over the past few months in the stock market as well. In fact, so much shorting that the NASDAQ fell more than 10% over the past few months and fell deep into correction territory. The S&P 500 was also very close to correction territory. But last week, a major short squeeze in bonds caused all of that to reverse in one fell swoop. And understanding why it happened will help you understand whether or not the rally that we saw last week is going to continue, or if we’re going to get a pullback.

Two things caused the short squeeze in the bond market last week. The first one was Federal Reserve Chairman Jerome Powell hinting that the soaring bond yields could mean an end to rate hikes. You have to understand that the FOMC, or the Federal Reserve, will put out a summary of economic projections once every three months to give investors and traders an idea about where they see interest rates going in the future. And the last summary of economic projections that we got about two months ago showed that the Federal Reserve was going to do one more rate hike this year. In fact, they were going to continue what they had been doing, which is to raise rates at every other meeting.

However, they did not raise rates. At the last meeting they paused for a second month in the row. And now this is causing people to ask the question of whether the Federal Reserve is finally done raising rates. Now, Jerome Powell said two things very interesting at the press conference at the FOMC meeting last week. The first thing that he said was when asked if the Federal Reserve was considering cutting rates any time soon, Jerome Powell made it very clear that that was not even on the table. Jerome Powell said, not only are we not even thinking about cutting rates, we’re actually questioning whether or not we’re going to continue to raise rates. Either way, the higher interest rates are going to stay for quite a long time. Jerome Powell indicated that he wouldn’t even consider cutting rates until possibly 2025.

Futures traders are now predicting a 90% chance that the Fed is going to pause at their next meeting in December, and about a 10% chance that the Fed is going to raise rates one more time at their meeting in December. Now, Jerome Powell did say that the Summary of Economic Projections is a little bit old and outdated and may no longer be true. And that caused a lot of hope in both the bond market and stock market. And as a result of that, it caused Treasury yields to fall as people started buying bonds again, because if Jerome Powell is no longer going to raise rates, then we know that eventually those rates are going to get cut, probably due to some bad thing in the economy, like a recession or inflation.

That means the longer dated bonds, the 10 year as well as the 20 year and even the five year, are now able to start coming back down, even if the two year and shorter remain elevated. And as a result of that, as those bond yields started to come down, this causes bond prices to go up. As bond prices go up, this causes short sellers to start to lose money, which in turn causes short sellers to start to cover, which in turn causes a short squeeze. But it wasn’t just Jerome Powell that caused bond yields to fall. US Treasury yields also fell on a slower pace of auction increases for longer dated debt that was announced by the Treasury Department.

So not only did bond prices rise after Jerome Powell indicated that there was a chance that they might not raise rates anymore, but bond prices also rose after the Treasury Department said that they were going to lower the amount of supply of future bond auctions. So with lower supply causing prices to go up, and the US Federal Reserve also no longer raising rates, which also caused bond prices to go up, all of this significant increased bond prices, which also caused bond yields to fall, caused a significant rally in the bond market, which in turn triggered a massive short squeeze. It caused tons of people to start buying bonds covering their short positions, which just caused a massive short squeeze in the bond market.

In fact, we saw bond yields fall from about 5% down to 4.5% in just a few short days – a massive 10% drop in bond yields. Can you imagine stock prices rising 10% in just two days? Well, that is exactly what happened in the bond market, and it was all due to this massive short squeeze. But that massive short squeeze in the bond market did not just stay in the bond market. Remember, the bond market has a significant effect on the stock market. The massive short squeeze in bonds also caused a massive short squeeze in stocks. Remember that as bond prices had gone down, this has also caused a lot of short sellers to start shorting the US stock market. And that’s one of the main reasons we saw the stock market fall so rapidly over the past couple of months is because of a huge influx of short sellers.

Yet they all had a massive short squeeze last week, which is why we saw the S&P and the NASDAQ both rise over 6% last week, with the Russell 2000 rising over 7%. In fact, it was such a major rise, it was the best week in the stock market in over a year. But I do want to warn you that the short squeeze may have been a little bit overdone. After all, bond investors ignored warnings from the Federal Chair that interest rates may have to stay at high levels for longer than initially expected. And with US 10 year Treasuries at about 4.5%, that means bond traders are now pricing in the Federal Reserve cutting rates in the very near future, despite the fact that Jerome Powell made it very clear that they have absolutely no intentions of cutting rates anytime soon. For the past year, the stock market has basically called Jerome Powell a liar, and now the bond market is calling Jerome Powell a liar, now pricing in rate cuts starting as early as their next meeting.

Now, there’s another reason why the rally last week might give bulls a little bit of a pause and think that it might not continue right away. And that is technical analysis. If you take a look at the S&P 500 daily chart, you will see that last week’s rally caused quite a bit of gaps on the daily chart, and those gaps will most likely get filled. Now just because gaps do almost always get filled, does not mean that we have a good indication of the timing of when those gaps will get filled. It does not mean that the stock market is going to fall this week and fill those gaps. Sometimes it can take years for gaps to fill. However, it’s worth noting that roughly nine out of ten gaps get filled eventually. So while bulls should be excited about the possibility of a longer term rally in the stock market, possibly back up to all time highs next year, we should take some short term caution over what the stock market might do over the next few weeks, because we do have those major gaps that almost always get filled. But I do think that once those gaps get filled, if we can turn around and start rising higher again, that’s going to be a real strong indicator of a longer term bull run in the market.

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