The BAN On Short Selling Has Opened Up Pandora's Box!!
Federal regulators have banned short sales of more than 800 stocks, mostly of financial companies, in an effort to stabilize prices in a shaky market. But the move may have an unintended consequence: reducing the stock market's efficiency and prolonging the current crisis.
Short-sellers, like investors who go "long" on a stock, make money by buying low and selling high. The difference is that short-sellers reverse the usual chronological order, selling first and buying back later, at what they hope will be a lower price. They accomplish this time switch by selling borrowed shares and agreeing to return them later.
So why do I say "The BAN On Short Selling Has Opened Up Pandora's Box"?
1. Who is going to be there to buy stocks if they continue to fall that actually adds the liquidity needed to stop a stock from a complete and total collapse? Let's face it, if it wasn't for short covering how do rallies and new uptrend's actually begin?
2. Short sellers still have a plethora of other stocks to now target and focus on that likely wouldn't drop as hard or as fast because we still have no uptick rule in place. So a stock that might have a 20% pullback over a month's time might now get a 40% pullback in two weeks time.
The uptick rule, put into effect in the 1930s, was intended to prevent short-sellers from accelerating the downward momentum of an already-declining stock. So we have sectors now that are getting crushed TWICE as hard because shorts are going to find something worthy of shorting anyway.
It could be for a hedge or for a variety of other reasons but now short sellers just have a more narrowed focus list of stocks to hammer, let's hope for all the "short seller" haters you don't own one of those stocks!
3. Every time any BAN on short selling in any country or on any index or in any sector it has NEVER prevented NEW LOWS coming! FACT!
4. The prevention of short selling won't change a companies underlying fundamentals, ask anyone that owns RIMM (Yes full discloser we have been short that stock from above $100.00 and had the puts for extra leverage on more than one occasion this past month.) The fact is people sell stocks for the same reasons as always since the beginning of time. Here are just 3 reasons why people sell.
1. Happy (With the profits)
2. Sad (With the performance)
3. Mad (Company failed to live up to expectations)
The bottom line, the only people who can bring down a stock are the ones who were once bullish on the company but now for which ever reason changed their mind.
This is like blaming a book of matches for burning down a house, rather than the person who set the fire.
For all those that thought this was a good thing check out the charts of stocks like X, CF, POT, GMXR, BUCY, MOS, MON, GDP, APA, AKS, CLF etc: because short sellers haven't gone away they are just now nailing all new sectors........Commodity related stocks especially!
Because laws are changing so fast this post might be removed, the color of RED might be illegal and if you mention the word BEARISH don't be surprised if you soon won't get a fine. Maybe that will help with the bailout plan, just "fine" anyone that sells stocks.
So the bottom bottom line, don't expect shorts to be running into cover stocks like C, JPM, GS, GE and a slew of other stocks when things get REALLY BAD because those BUYERS have left the building!
Another brilliant move compliments of those that are just as incompetent of the very people running the companies in which the ban has been placed on.
