U.S. equities surged out of the gate on Wednesday again in quiet trading with no apparent catalyst for the move. The chatter around trading desks was that the “pain trade” was driving prices higher as many have accumulated large short positions against the market in recent weeks, as evidenced by the surge of inflows into long volatility positions.
Forced to finger a cause, Tuesday’s strong new homes sales report and overnight reports of a fresh bailout for Greece could be cited for the move. But technical reasons, and rotation into underperforming areas like Big Tech stocks, is the more likely cause.
In the end, the Dow Jones Industrial Average gained 0.8%, the S&P 500 gained 0.7%, the Nasdaq Composite gained 0.7% and the Russell 2000 finished 0.5% higher. Treasury bonds weakened, the dollar was mixed, gold lost 0.5% and crude oil gained 2.2% to close at $49.69.
Energy stocks led the way higher with a 1.5% gain followed by materials, up 1.2%. Utility stocks were the laggards, down 0.3%. Hard drive maker Western Digital Corp (NASDAQ:WDC) gained 4.4% after being upgraded by analysts at Barclays noting that traditional hard drives will not be completely displaced by more expensive solid-state drives over the next decades.
Alibaba Group Holding Ltd (NYSE:BABA) dropped 6.8% on a disclosure that the SEC is investigating its accounting practices concerning related party transactions and sales data.
Overnight, China lowered its currency to its weakest level since March 2011 as it prepares for further Federal Reserve rate hikes and additional strengthening in the U.S. dollar — to which it maintains a loose peg. And a new Greece bailout secured the nervous participation of the International Monetary Fund in exchange for a promise by Germany and others to consider restructuring their Greek debt holdings in 2018 if needed.
Turning to the Fed, there were more hawkish noises. St Louis Fed President James Bullard said while a June or July rate hike wasn’t set in stone, strong labor market data pointed to the need for a move. Dallas Fed President Kaplan said policymakers needed to act soon.
All eyes are now on Friday’s speech by Federal Reserve Board Chair Janet Yellen; if the current market rebound can be sustained in the face of strong support of a rate hike this summer, we will likely see a push above Dow 18,000 and beyond as Wall Street’s single major worry is alleviated.
But with corporate earnings soft, GDP data uneven and everything from oil prices to market stability threatened by higher interest rates, I don’t think the response will be so benign once the current short-squeeze is played out.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
