I was just as happy as anyone who owns stocks to see the Dow close over 9,000 yesterday. But the question that remains unanswered is why exactly did stocks rally? There are four reasons commonly offered to explain the recent rise in stocks: their prices were cheap relative to earnings, the economy is getting worse more slowly, second quarter earnings are better than expected, and investors are focusing on the economic recovery. I don't think any of these explanations hold water.
One explanation that might make sense is that cash is scrambling into stocks -- due to both short covering and huge cash balances afraid of being left behind. Short sellers bet that a stock will fall by borrowing shares from a broker and selling them at what they think will be a high price. If their bet is right, they can repay the stock loan by buying shares back in the open market at a lower price.