Well the short covering started today right before Bush-43's speech to the Manhattan Institute. The reason for the big rally was purely technical not fundamental.
What does that mean? Well, there are 2 major types of investment analysis in the financial world today. There is the accounting-based analysis called fundamental analysis that tries to tie the price of a financial instrument to the fundamental accounting and business operations of the entity upon which the instrument is based.
In other words, fundamental analysis reads and tries to understand financial statements of a company or corporation. The problem with this is that if fundamental analysis was so great then why did we miss the Worldcom, Enron, Tyco, Fannie Mae, Freddie Mac, Bear-Sterns, Lehman Brothers, Merrill Lynch, etc failures?
That's the problem: the financial papers are so complex and so ripe for cooking by accountants and lawyers that its almost impossible to be able to look at financial statements and get a clear understanding of just what is going on inside the entity under inspection. Why do analysts disagree on the financial health of a company when they are all reading the same financial statements?
I will tell you: its not that clear and that is why fundamental analysis is flawed.
The second type of analysis is called technical. It is basically constructed on the simple premise that the only thing that matters for a financial instrument (stock, bond, option, future, etc) is the stream of prices and volume of those transactions. When someone is willing buy and someone is willing to sell at an agreed upon price/volume point, then all the other analysis is done and the resulting tick (transaction of time, price, and volume data) is entered into the exchange data streams.
Technical analysis is the purest form of analysis because it doesn't use the financial statements for the reasons mentioned above or the words that are coming out their mouths for the basis of the entities financial instruments. It uses on the three items of the tick: time, price and volume.
Analogy: using fundamental analysis is like your doctor diagnosing you medical status and health from only your medical history, test results, and physical inspection. Technical analysis is your doctor using instruments like an EKG, EEC, Pet scan, MRI, CT, and ultrasound to determine what is the real goings on regardless of what you say or what a test says.
Hope that helps. Today, the rally was a technical rally since nothing fundamental in the market place has changed. It will be interesting to see if the rally runs out of steam and stays in the 825-1000 range I predicted on this blog back on October 30 when I said... (well you can read it yourself.)
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