Year-end market situation stable? CPI drives short "panic" cover and boosts US stocks.

After the unexpected cooling of inflation data released by the United States, the US stock market rose. Due to the failure of short selling bets, there was a rebound in short positions, making it the largest increase since May. Stocks that were heavily shorted, including Beyond Meat (BYND.US) and Maxeon Solar Technologies (MAXN.US), surged 6.8% at one point during the trading day, before giving back some of the gains. However, they still easily outperformed the 2% increase in the S&P 500 index.

Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, said that this gap indicates that some investors are preparing to cover their short positions, which often pushes up the stock market. Murphy stated, "At the same time, there is panic in the market about short covering. Once most of these short positions are covered, it could be a signal that the rebound will gradually disappear."

Optimism has been built on bets that interest rates have peaked and that the Federal Reserve will end its rate hikes. The S&P 500 index has risen 9% in the past 12 trading days, with investors seemingly unconcerned about the risks of the Middle East conflict and the US government shutdown. The stock market rebound has been both rapid and widespread: the NYFANG+ index, composed of major tech companies such as Microsoft (MSFT.US) and Tesla (TSLA.US), is expected to deliver its best performance ever in November; and unprofitable tech companies have risen 11% so far this month, while the Russell 2000 index had its best day in a year.

Quincy Krosby, Chief Global Strategist at LPL Financial, said over the phone, "The fear of missing out is very strong. Inflation is coming down, and the market is clearly celebrating that. At the same time, the battle against inflation is far from over. The market is still asking, will this situation continue?"

Investors are becoming increasingly comfortable with risk, prompting short sellers to buy back stocks to cover their short positions. Data shows that a strategy of buying back the most heavily shorted stocks, which took the longest time to cover, has lost 40% over the past three months, wiping out the gains from January to July.

Seasonal Bull Market

After three months of bearishness, seasonal indicators have turned bullish in November. Data compiled by LPL Financial since 1950 shows that historically, November has been the strongest month for stock market performance, and it marks the beginning of the strongest two-month and six-month periods of the year.But the weakness in November is approaching. Jeffrey Hirsch, editor of the Stock Trader's Almanac, said that during the middle of this month to the Thanksgiving holiday in the United States, the market tends to trade sideways and then rebound at the end of the month.

Bulls need this momentum to show up and continue until the end of the year. A survey by JPMorgan Chase showed that 36% of clients plan to increase their stock exposure, but nearly 70% of clients are not willing to go long on the so-called "Fabulous Seven Sisters" technology companies - Apple (AAPL.US), Alphabet (GOOGL.US), Amazon (AMZN.US), Meta Platforms (META.US), Microsoft, NVIDIA (NVDA.US), and Tesla. This is because the group's expectations for fourth-quarter profits and sales have become mostly dim.

Since hitting a recent low on October 27, the S&P 500 index has been rising almost uninterrupted. A study by Deutsche Bank on the performance of the S&P 500 index since 1928 shows that historically, October 27 marks the end of the autumn seasonal weakness and the beginning of the holiday rebound.

Investors have also taken note of this. An indicator measuring non-essential stock investors' stock exposure at Deutsche Bank rose to a slightly positive range last week, after hovering below neutral levels for over a month. This has brought the overall indicator of stock positions for rule-based and discretionary investors to a neutral level.

Damanick Dantes, portfolio strategist at Global X, said, "Currently, positive seasonal factors and short covering continue to support risk appetite, which is supported by the decline in US Treasury yields. The market continues to prepare for the end of the Fed's rate hike cycle."