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Yesterday’s Market Rally Was a Short Squeeze, Not a Reaction to Powell’s Speech

Courtesy of Pam Martens

Jerome Powell Is Sworn In As Federal Reserve Chairman on February 5, 2018 by Fed Vice Chairman  Randal Quarles.

Jerome Powell Is Sworn In As Federal Reserve Chairman on February 5, 2018 by Fed Vice Chairman Randal Quarles.

It felt like headline writers were out to engineer a stock market rally yesterday by scaring hedge funds that had shorted the market to the tune of tens of billions of dollars. When traders who are short the market act simultaneously on breaking news, (news that suggests the stock market is going to rally), by buying back stock to close out their short positions, that causes a big upward spike in the stock market. In Wall Street parlance, it’s called a short squeeze. It happens a lot in a secular bear market and is a head fake to investors desperately looking for a bullish trend.

A number of major business publications put a bullish spin on what the Chair of the Federal Reserve, Jerome Powell, actually said in his opening remarks yesterday morning at a conference sponsored by the Federal Reserve Bank of Chicago. What Powell actually stated was this:

“I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

Powell’s promise to “act as appropriate” could mean many things other than an interest rate cut. But here’s how his statement was reported by the business press.

The Wall Street Journal reported Powell’s statement this way: “Federal Reserve Chairman Jerome Powell said the central bank is closely monitoring the recent escalation in trade tensions and indicated it could respond by cutting rates if the economic outlook deteriorates.” Powell never once mentioned the words “cutting rates.”

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