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Jeffrey Gundlach: Rally in US Stocks Looks Like a ‘Short Squeeze’

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Jeffrey Gundlach discusses his view on the current market scenario

On Tuesday, May 21, 2016, the CEO of DoubleLine Capital, Jeffrey Gundlach, said in a telephone interview that the US stock market (QQQ) is “dead money.” He said that the recent rally in the US stock market (IVV) (VFINX) is like a short squeeze. He also focused on the recent corporate earnings of companies in the S&P 500 index (SPY) and the Fed’s decision on a possible rate hike in June.

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Why does the rally look like a short squeeze?

According to Jeffrey Gundlach, the recent rally in the US stock market looks like a short squeeze. A short squeeze is a situation where massively shorted assets move sharply higher. It puts pressure on the short seller to close out short positions—usually at a loss. It puts more pressure on the stock.

It’s important for investors to understand that short covering and short squeeze are two different things. In short covering, the short seller closes out his position in profits. In a short squeeze, it puts pressure on the short seller to close out his short positions—usually at a loss. A short squeeze is generally caused by positive changes in the stock market. The positive change may be a temporary turnaround. The short interest ratio is used to determine the market’s sentiment. If the short interest ratio is very high (five or greater), it could be a bearish signal and vice versa.

Jeffrey Gundlach also categorized US stocks as “dead money.” This indicates that there isn’t fresh buying happening in the market (IWM). The market’s rally is mainly driven by the short squeeze and stock buyback by various corporate houses. It indirectly indicates that the easy money provided by the Fed drove the market. The chair and CEO of the Duquesne Family Office and billionaire investor, Stanley Druckenmiller, spoke at the Sohn Investment Conference 2016. He said that easy money provided by the Fed drove the market. Read Stanley Druckenmiller: Why the Bull Market Is Exhausting Itself to learn more about his view on the bull market.

In the next part of this series, we’ll analyze Jeffery Gundlach’s view on SPY’s corporate earnings.

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