| NEW YORK, March 12
NEW YORK, March 12 The dramatic rally on Wall
Street this week was caused partly by traders who had been
betting on declines moving to cover their short positions,
another sign investors may see the credit market problems as
far from over.
Financial shares led Tuesday's rally, giving Wall Street
its biggest gain in the Standard & Poor's 500 index since
October 2002, on hopes that credit strains may ease after the
Federal Reserve pumped $200 billion into the financial system.
But Wednesday's lack of follow-through was a signal
investors were not quite convinced the worst was over for the
market as financial company shares resumed their downward
trend. The S&P financial index .GSPF fell 2.1 percent on
Wednesday after gaining 7.4 percent on Tuesday.
"I think in the financials that was mostly short-covering
than it was straight buying," said Georges Yared, founder and
chief investment officer, Yared Investment Research in Wayzata,
"I don't think we've seen some strong buying yet on the
financials," he said.
Short-covering is when investors scramble to buy stocks
that they had bet would decline in light of a turn to positive
developments. Short-sellers seek to make money off of declines
by selling borrowed stock in the hope of buying the stock back
at a lower price to cover the loan, and pocketing the
Short interest levels have been hitting record highs in
Last week, the New York Stock Exchange reported short
interest jumped 4.2 percent in late February to an all-time
high, surpassing a previous record from Feb. 15, suggesting an
increase in bearish sentiment in the stock market.
And, at the close on Tuesday, short interest figures
released by the Nasdaq exchange showed short interest on the
Nasdaq also rose in late February.
Some analysts say there was very little new, or long-term
money being thrown into the stock market.
"There are still underlying huge questions about the credit
quality of the banking system," said Fred Dickson, market
strategist at D.A. Davidson & Co. Lake Oswego, Oregon.
"I think we're in process of going through putting in kind
of a prolonged trading range where we bounce up and down in
At the heart of the market's unease is fallout from the
housing market slump, which has rattled financial credits,
causing credit tightening and fears of more loan losses for
The credit turmoil also has raised worries about a U.S.
recession, and the financial companies sector has been among
the hardest hit in recent weeks as these concerns about credit
markets and the economy have increased.
The recent figures also mean that there are "a lot of
shorts to cover," Harrison, New York-based Bespoke Investment
Group founders Paul Hickey and Justin Walters wrote in a report
Wednesday, noting it suggests the market has further to run in
the short term.
Not all strategists saw Tuesday's move as a short-covering
"There was some short covering, but the dramatic sell-off
in the 10-year Treasury market says to me money came out of
Motherhood -- U.S. government bonds -- and some of it went back
into the stock market," said Al Goldman, chief market
strategist at A.G. Edwards in St. Louis. "We've got high levels
of cash on the sidelines, and some of it got spent."
But some analysts noted that while volume on the New York
Stock Exchange was heavier on Tuesday than it has been
recently, it was not as strong as the market's advance may have
"There's still a tremendous amount of short covering out
there, and we're not seeing the volume that we should see
associated with a (400) or 500 point move," said Anthony
Conroy, head trader at BNY Brokerage, a unit of Bank of New
The Dow rose 416 points on Wednesday, and saw its biggest
one-day percentage gain since March 2003.
(Additional reporting by Ellis Mnyandu and Justin Grant;
editing by Leslie Adler)