MARKET SNAPSHOT: U.S. Stock Market Tossed About By Financials, AIG

By Kate Gibson

One of the U.S. stock market's most volatile sectors on Thursday proved to be its most active amid talk of short-covering and ahead of Friday's anticipated results from insurance giant American International Group Inc.

For a second day, trading volume in the financial sector accounted for "an extraordinary percentage of overall NYSE trading," noted Peter Boockvar, equity strategist, Miller Tabak & co.

In Thursday's trade, Citigroup Inc. (C) and Bank America Corp. (BAC) alone are 25% of total consolidated NYSE volume, Bookvar said.

Shares of Citigroup climbed 6.2% to $3.80 and Bank of America rose 0.2% to $16.70 a share.

On Wednesday, Citigroup "was part of a rebalancing and was the excuse for the large volume but amazingly, volume today is almost tracking yesterday's pace," Bookvar added.

On Thursday, the financial sector's early gains faded in afternoon trade as the major indexes posted losses for a second day, with the retreat coming after a four-session winning streak.

The Dow Jones Industrial Average (DJI) fell 24.71 points to end at 9,256.26, while the S&P 500 (SPX) dropped 5.64 points to 997.08. The Nasdaq Composite (RIXF) shed 19.89 points to 1,973.16.

Leg up?

"My sense is this thing does have some legs," said Max Bublitz, chief market strategist for SCM Advisors, of Wall Street's recent upward swing.

"A lot of the institutional managers did not participate, and are trying to play catch up. Hedge funds participated even less. So there is a little squeeze going on, if not a short squeeze, a non-participation squeeze," said Bublitz.

Shares of AIG (AIG) gained for a second day, finishing 2.4% higher. The insurer's shares jumped 60% on Wednesday with some attributing the move to investors scrambling to cover short sales after the firm set a stock split earlier this year. .

Short interest in AIG hit its highest level ever less than three weeks ago according to the online Wall Street Journal, which cited New York Stock Exchange data.

"Short interest and possible 'squeeze' result when something material happens to a company that was unexpected, such as buyouts or major contracts," Marc Pado, U.S. market strategist at Cantor Fitzgerald, said in an email.

"AIG has been talked about because of its 20-for-1 reverse split. What happened, in this case, is it is no longer a penny stock. Many funds cannot hold stocks under $5 or even some under $10 per share. That's why they do the reverse split. Once split, companies can now buy, and that can force those short to try to cover or get squeezed," he added.

Miller Tabak's Bookvar on Wednesday noted a similar situation with shares of manufacturer and chemical maker Georgia Gulf Corp. (GGC).

"GGC is another stock that had this big reverse stock split, and its stock went from $7 to $36 in five trading days. It's another example of where the float has dramatically shrunk, and now there's a massive short squeeze going on," he said.

The New York Stock Exchange on Tuesday said it had contacted Georgia Gulf due to the "unusual market activity" in the company's shares, with the firm declining comment.