In two words: short covering.

Markets faltered right out of the gate this year, falling 10.5% through February 11th. Then, as if by some stroke of luck, the market recanted and marched 8.8% higher. Last year, we saw the rapid ascent of growth stocks. Ordinarily, one would expect cheap stocks to outperform, but last year was the exact opposite. Energy names, which have been absolutely hammered due to the decline in the price of oil became incredibly cheap on the basis of their book value. But, as earnings also declined, names that were cheap on the basis of their book value became very expensive relative to their earnings. Breaking down the S&P 500 Index into 10 buckets by the Price to Book ratio from Cheap to Expensive, below, reveals that Expensive stocks outperformed Cheap stocks in 2015 by 31.9%, a truly astounding feat. Names falling into the "Cheap bucket below are stocks like Ensco, Diamond Offshore, and Marathon Oil--down 56%, 49%, and 59% respectively.

Interestingly, stocks in the cheapest bucket by Price to Book are still lagging far behind the market in 2016, delivering an average return of -10.3% through last week. Though we can't discern a whole lot about what is driving the market from this basic view of valuation based on Price to Book, there is a distinct trend based on Short Interest.

There has been a good bit of chatter recently about the performance of the most heavily shorted stocks. As if 2015 were not a strange enough year with the most expensive stocks outperforming, 2016 is shaping up to be another interesting one. The chart below separates the S&P 500 Index into 10 buckets based on the ratio of short interest (the number shares investors have shorted for a particular stocks relative to the stock's average daily volume). The chart illustrates that the LEAST shorted stocks have delivered a -8.8% return, while stocks with the HIGHEST short interest, stocks that investors have heavily shorted, have appreciated by +3.5%.

Notice also the steady monotonic trend from lower left to upper right. This suggests to me that short-covering has been behind the market rally since mid February. Unfortunately, the out-performance of heavily shorted names can only persist for a finite period of time.

My main take-away: be weary of the recent market rally. If it is being driven by short covering, we could see the rally start to sputter. However, as I wrote here, there are positive signs in the out-performance of some fundamental factors like dividend yield and various quality metrics. I expect, and hope, differentiation based on fundamental factors like value and quality, as opposed to technicals like short interest, will be an ongoing trend as the markets gradually move away from monetary policy support.