You'd think yesterday's midday headline — that two people were killed in Poland, due to a missile of unknown origin — would be a source of serious concern to the markets but, after a brief dip, stocks ended not far from where they were before that news. It's a sign of how powerful this recent market rally has become. In the last week, the S & P 500 has risen nearly 7% on a combination of a change in the macro environment, coupled with strong seasonal trends. Inflation (CPI and PPI) is going in the right direction. China is looking like it is going to be more realistic on Covid. The seasonal factors are unusually strong: there is the tendency of the market to go up once November starts, and there is an additional strong post-election uptrend, especially in the three months after midterms. Are investors really convinced the bottom is in? How much is real buying, and how much short covering? Ihor Dusaniwsky tracks short selling as Managing Director of predictive analytics at S3 Partners. While long buying has been a factor in the rally, "I am seeing short covering recently as the market is surging," he told me. In the second week of November, he saw traders cover $22.1 billion in short bets on S & P 500 stocks. "Looks like there is a lot of institutional sentiment pointing to at least a short term floor has been hit and the market is poised to rally," he told me. That makes sense, Eric Johnston, head of equity derivatives and cross asset products at Cantor Fitzgerald, told me. "Hedge funds have been crowded shorts, and mutual fund cash levels are high," he said. "I don't think anyone is betting this is the next big leg of a bull market — I think this is mostly forced short covering based on end of the year positioning." He is doubtful that this is going to lead to more long buying for a simple reason: valuations are really stretched. "It is now consensus the Fed will be almost done in the next few months, that China's zero Covid [policy] will be eased, so that is priced into the market," Johnston told me. The problem now is, "valuations are really rich. I think it will be hard to get the market above 4100 on the S & P 500. That is 18 times 2023 estimates." It's hard to get the market to trade at a forward multiple of 18 for very long. Johnston noted the only time we have traded above 18 is post-Covid, and then during the internet bubble in the late 1990s. "Right now, with where rates are, there is no justification for that [high multiple]. You have a valuation ceiling with very little justification for an upside." Another issue Johnston notes, is that there are now alternatives to stocks, particularly with some bonds sporting yields north of 4%. If you believe the upside for the markets in the next six months is very limited, many investors may pass on stocks and stay in bonds. "If you think the upside for stocks is only 4% [in the near future], you might as well buy a money market fund," Johnston said.