Why Does the Market Go Up Every Day?

Why does the market go up every day? Some imply that a Plunge Protection Team (PPT) is at work behind the scenes, manipulating the market in advance of the elections. Instead, I suggest a reason called “Flat Covering.”

This isn’t because shorts are getting squeezed; this is not “short covering.” It is people who are flat getting squeezed because they’re not fully invested and they’re tired of running alongside a moving market.

After surviving the dump in May/June/July, they distrusted the bounce and decided it was safer to have net flat exposure. But now long/short guys are watching their short book get crushed every day and are gradually getting sucked into the long side. Dare I say it? The market sticks to your ribs like a nice warm plate of Shepherd’s Pie.

Just in time for the elections. It is my strongly held belief that the mid-term elections will be a disaster for the Republicans. This outcome is definitely not my wish, just the highest probability outcome. All extreme liberal Democrats will vote Democratic. All liberal Republicans will vote Republican. Disgusted conservatives will stay home, refusing to vote for a liberal Republican.

The outcome will become dire for this Administration and the nation, and predictably the markets will react accordingly.

The smart money has already evaluated possible sector trades that would work best with a Democratic victory, directionally speaking. However, with especially strong Democratic gains, the broad market likely gets hit for three or four percent. The bigger question is: sell now and lock it in, or hang on and buy more on the flush?

For the record, this could be the biggest Chicken Little call ever.

A Market Professional

Posted October 18, 2006 05:21 PM
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