Traders are paying cash for clunkers of a different kind this week. Shares of AIG exploded in the late morning yesterday and have kept going today, rising more than 90 percent in two days.
Pundits have largely chalked up this amazing move to short covering before AIG's earnings report Friday morning. Traders betting against the stock don't want to be caught flat-footed with the potential for any good news out of the report. But is a double justified?
Take a look around the last two days and a similar trend emerges. If you were a financial on the verge of collapse (or you actually collapsed ) earlier this year, your shares were surging this week. Fortress is up 19 percent in two days. Hartford is up 7 percent. Even the collapsed Fannie and Freddie are jumping on reported plans to split them into a good bank/bad bank structure.
Short-covering is definitely the culprit here, said Pete Najarian, Optionmonster.com co-founder and FM trader, on our investment call this morning. Once these shorts get washed out, the rally may be due for a pause next week, according to Najarian.
This dash-for-trash theme actually isn't new. Since this rally really took off on July 10th, equity shares of companies with junk S&P credit ratings have soared 19% or greater on average, according to Bespoke Investment Group. Meanwhile, the highest-rated companies (rated AA or higher) have gained just 12 percent during this run.
The analysts at Bespoke say this is not necessarily a bad thing over the long run, however. "Some will argue that since low-quality stocks are leading the market, that it is a 'low-quality rally,'" wrote the Bespoke analyst in a note to clients last night. "We would note that in studies of prior market rallies, lower quality stocks typically outperform higher quality names in the early stages."
We'll settle the debate tonight.
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