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The veracity of the rise in the stock market off the March 23rd lows has confounded many stock fundamentalists as the contrast of the ongoing economic deterioration versus the record-high valuation level of stocks seems to defy logic. The quick, aggressive action of the Federal Reserve to provide massive amounts of liquidity into financial markets effectively put a floor under stocks as investors believed the U.S. central bank had ‘their backs covered.’ Larger funds re-allocated money from bonds into stocks and passive investments once again surged. The subsequent recovery was lead by the technology sector and other ‘stay at home’ stocks. But the real surprise in our view has been how the recovery has continued and now migrated over to the most speculative names and sectors, as money has shifted into the laggards such as airlines, cruise companies and the ‘resurrection of the value trade’. Moreover, the most shorted stocks have surged over 80% since the lows; outperforming the overall index by a factor of two times! (more…)