Reasons the Recent Rally May Not Last

Brittney Barrett  |

Yesterday was an unusual day for equities with the Commerce Department reporting flat U.S. growth for August across the economy. Every area from jobs to sales was stagnant in the month of August. When the economy is teetering on the edge of a recession, a lack of growth is rarely seen as worth celebrating, and yet the market rose.

There are several reasons for this, and they may be the same reasons that will prevent this from being an on-going volatility. In recent weeks, the market has been primarily defined by massive volatility. Many analysts had begun accepting the swings as the new standard in trading but then this week, the market has been edging higher more moderately, though no news seems to have been released that would have shocked it back into hesitant bullishness.

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The explanation may be that shorts have begun shifting. As of this week, the NYSE short interest reached its highest level in roughly two years.

Volume on the market is low and many short are protecting their bets, driving up prices in spite of the lack of external impetus for a rise in prices.

In addition to the end of shorting, the current levels and forecasts appear to be driving contrarians. The contrarian view, adopted by many well known investors, is to act against the consensus forecast. Right now the mood on Wall Street is bearish. That pessimism is inspiring contrarian investors, presented with a platter of fallen stars still trading below 52-week highs, to invest.

Stocks, however, are not at their lowest levels of the past month so actual buying is slowing down and the deals slowly dissipate. Once the market evens and there are more finite indicators in terms of the direction of the market, the volatility swings may return.

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