I see a lot of traders around the web getting excited by this ban on short-selling financial stocks. Why don’t we take a look at how well banning short-selling has done in another major market. Here is a chart of the Shanghai index from Yahoo Finance (click to enlarge):
Hmmm…a drop from 6000 to 2000? …doesn’t strike me as bullish…
If anybody knows the history of the ban on short selling in China, please post a comment. After a few minutes of searching I wasn’t able to google-up anything beyond the fact that the Chinese don’t allow short selling.
Matt;
Very revealing.
Short-selling obviously is not THE (only) reason selling occurs. Perhaps it’s just another method in the arsenal of trading weapons – simply pull out another weapon when one is out of ammo. Let’s see…option puts, inverse stocks, or simply sell the stock?
What we have here is a scapegoat to appease the financials.
matt, here’s a chart from ‘dealbreaker’ that demonstates the futility of a short sale ban:
http://dealbreaker.com/images/thumbs/sg2008091935979big.php
Don’t bet the house on it but I am pretty sure short selling has never been allowed in China. it’s a relatively new market and I don’t they reached that point yet in development.
Hi Matt,
Can I trouble you to repost your technical analysis book recommendations? I have tried to search the site but wasn’t able to find it.
I have been working under the (wrong, it seems) assumption that technical analysis cannot work. But logic also dictates that what is working should be studied
Thanks,
Gigi
Matt, this is not about China, but a comparison how this week’s actions including fighting evil sellers resembles Japan’s inefficient policies during the 90ies. http://www.rgemonitor.com/asia-monitor/253682/the_cure_for_the_us_financial_system [As soon as a market is established (this would be the fast solution), banks will have to face the write-offs (as they can't we currently have no market and therefore there will be no fast govt solution)]
This short-selling ban is highly effective immediate-effect market manipulation accompanied by some other actions to prevent the public from understanding main cause and effect. It is appalling to see changes in market regulations being introduced during trading hours again and again when the market threatens to fall through key resistance levels. I look forward to seeing this introduced next time: http://www.cnbc.com/id/26439444.
On the international front here is nice one from an old friend right to the balls:
Merkel Slams US, Britain for Blocking Tighter Financial Controls
Merkel criticized the US and British governments for obstructing Germany’s efforts in the first half of 2007 to bring greater transparency to the markets. “I criticise the perception that the financial markets have of themselves,” she told the paper. “Alas, they have opposed for too long the introduction of rules with the backing of the British and American governments,” she said. “On top of national rules, we need more international agreements to stem irresponsible financial speculation.”
http://www.dw-world.de/dw/article/0,2144,3658674,00.html
With regard to the RTC solution can someone help me with these questions:
If a RTC-thingy were to start buying toxic stuff at bargain prices, wouldn’t the Fed then have to apply these bargain prices to the crap dumped on its balance sheet? Why were the litterbin-of-last-resort measures the Fed recently had undertaken not sufficient (accepting questionable quality at almost face value eg higher prices than the RTC will ever pay)?
Paul Krugman doesn’t like this New Deal.
http://krugman.blogs.nytimes.com/2008/09/20/no-deal/
look like I have changed my mind. Can’t force measured moves and EWT theory onto what is obvious as to what has happened. So I am going to say a near term bottom was put in Thursday. the pattern looks very similar to the March bottom. If the daily MACD confirms, and it looks like it will, an intermediate term rally is in order such as off the March lows. There is a SPY call buy point at 121.84-122.
BTW Matt, although banning short selling in so many finance stocks would cause problems if a finance panic set in since there would be no buying until longs bought to support the market, there is a lot more going on here. Additionally, the ban does take downward pressure off the sector.
SPX price target = 1360 – 1380. and possibly to the 400 day which is now at 1413.72.
http://tinyurl.com/4lnavo
http://tinyurl.com/4zyywp
http://tinyurl.com/3eugxz
and if I am wrong I have puts from fading the gap and some at 122. so as long as we either have an orderly pullback or the Fed causes a selloff from either the deal falling through or them trashing shareholder equity, I will make a decent buck. As long as the 126 resistance isn’t broken though first.
Thanks to Matt, David, and others for your thoughtful posts and efforts at educating those who wish to learn.
Seems like a pullback/consolidation is coming this week, then a rally, but I don’t believe the bear is done yet.
Well jungle, it’s best to keep an open mind. It is possible that that was THE bottom. We have to see if SPX can break out of the channel in the coming months
David,
Agreed. Just saying I see a lot of people calling THE bottom right now, and the market hasn’t yet proven that to me. I’m more than happy to trade the long side–better for our country if that WAS the bottom. I can only trade what’s in front of me now, and what I see in the short run.
You are right–all traders always need to keep an open mind. Thx.
well well well. it’s not sunday yet so here is the paulson plan
http://themessthatgreenspanmade.blogspot.com/2008/09/hank-paulson-has-plan.html
There is only one way for this treasury plan to actually work: buy the mortgages at 4-5x their actual value, at taxpayer expense and make the banks solvent. Note that the plan currently omits how they price these assets and how they decide if a company is “worthy” of having their assets purchased. It also mentions that they can buy “other assets” to stabilize the market (stock?).
The root of this crisis is not a liquidity problem. Increasing liquidity does not increase wealth. Buying these assets back at their true value still leaves these banks insolvent. That is why they are holding on to them in the first place! (Hobson’s choice, anyone?) Removing short selling will let their stock price stay inflated a bit longer, buying them some time, but the fundamentals have not changed.
David: We just retraced 10% in two days (!). The March rally only retraced about 10%. By banning short selling, I believe the behavior of the market has been fundamentally changed. I would think of this as more of a step input or a spike in the system (a “reverse crash” if you will) and I don’t believe EW theory was designed to handle it. In other words, most of our traditional analysis methods may be busted, for the time being. Time will certainly tell. My hare-brained prediction is that the moment we have two down days in a row, this rally is kaput. At this point I should point out my current score: Towelie 0, Market 3.
When I first saw the news about this short selling ban, the picture I had in my head of the future direction of the market looked very similar to that plot bob posted of the Pakistani market: A big spike for a few days, followed by a slow and steady drop down. My reasoning is that people have made a quick buck in the last few days and are/were spooked about the general market so they will start selling fairly soon after. We have already heard that the bottom was in several times now, so people are less confident in the market. Selling will be a bit more orderly since there are no short sales pressuring the market downward and less fear that a major announcement will make the market plunge now that the government has jumped in. So significantly less volume, but decreasing prices for a while until we break down again and selling starts to pick up. Maybe that’s too simple…anyone else agree/disagree?
Implied volatility is absurdly high right now…buying options is very expensive at the moment, so I am a little weary of buying puts as a way to short the market. I really can’t imagine how IV could increase significantly from its current point, so selling puts or calls could make you a bundle.
Still all cash right now since I feel like I might as well have a dowsing rod to determine market direction.
PS – Thanks for those links, Yerk.
I swear that post didn’t look that long when I typed it…
The end of a major bear phase, i.e. THE bottom, is supposed to occur when 90% of volume and 90% of prices are down on a single day, and then, within 3 days, 90% upside action occurs on V & P. The end of the bear in 2003 fit this criteria.
Will that occur this time? Who knows. I could make a case for going up or down from here. Better to have ideas and chart points (like David’s great charts–thanks) and let the market reveal itself.
I have no problem with this being an intermediate bottom. Is it possible this was THE bottom? Yes. Is it likely? I personally don’t think so. Not enough blood yet. Feels more like 1929. Should we play a rally? Yes. Should we stay on alert for more down action? Definitely.
Opinions?
towelie is your username after the towel on Southpark? If so, yes you can certainly get high now. You will need you spinach to trade this crazy market. LOL
Jungle – think you’re on target. Trade what’s in front of us. That said all the BM rallies this year have been based on denial of metastasizing economic realities which are now becoming clearer. For this to be THE bottom requires that we’ve seen the worst on offer from the economy.
I think we were just seeing the beginnings of a much more severe downturn with the recent data. And that was before we got two vicious feedback loops going with the economy worsening credit and credit worsening the economy.
On the 16th s.t. rates on Treasuries spiked to 0% That was a worldwide collapse in the credit markets, spreads are still high and on Th until the leak of the RTCII the market was down another 8% and truly crashing. While I was all in short and personally benefited and got hurt rather try and make it back in a functioning economy. Even if the PPT, or as some are calling it in London Team 1250, keeps us from crashing there’s still a lot of pain to work thru.
It seems to me the driver right now is sentiment shifts in the market – are we still in denial or working our way toward acceptance.
towelie – your view does seem too simple, but it sure does sound like a very likely outcome. I also share your view, even more so after I saw the Pakistani chart.
It will be interesting to see if the shorting BAN is extended beyond 10/2/08. One has to believe that the selling will start a few days before the ban is lifted from profit taking. Anyone have an opinion on shorting GE if it is not added to the list this weekend?
also the housing data this week will probably bring market down.
oh btw anyone notice the drop in volume in the dow during the past 3 days? the index climbed but in lesser volume than earlier days. I have seen that as not a good thing but then again things are crazy now so we shall see
Just to clarify, this is not a short selling ban a la no shorting in China. This involves only financial stocks (mostly).
What it will probably do is give these companies a chance to recapitalize while moving bad bonds off their books I would suppose.
Anyways, I just want to point out that it is not a complete shorting ban.
I also, like David, am leaning towards a tradeable bottom here. Some form of weak pullback to consolidate would be a nice point to try going long.
Why is everybody talking about bottoms? Are you monkeys? These animals are obsessed with their bottoms as you guys obviously are. Is this here “Planet of the Apes”? We go down at least 20% from here!!! I hope the market goes up the next few days. Another big shorting opportunity. I will short myself into oblivion.
The one loose cannon out there right now is Ambac. Y’all see that sucker crash and burn on Friday?
Good call Dressguard. If the U.S. Government had said you’re on your own folks in August 2007 we would have hit bottom in housing and stock market by now or very soon. The bad assets already liquidated and we would have been on the way in a healthy recovery.
Instead they are creating a greater depression. What do you think happens with house prices and foreclosures with the new gigantic bail-out plan? No lender with over-valued assets on his book will sell any houses at street value. They will all be waiting for the bail-out. Result: Foreclosure process will freeze up and house prices will fall even further.
Matt: We’re going to have to change our claim that Bernanke has not been inflating since 2006 soon. He has not inflated, but he must do it now. I will be a gold bug start 2009, sorry folks. Let’s follow the monetary base statistics.
Disclosure: I was up 100% YTD Thursday closing time in Europe. Got greedy and bet on a crash. Now up 40% YTD, thank god I don’t use leverage. Still short, this for the long term since I am such a bad trader.
Dguard, Larry, here, here.
In case anybody’s actually interested in surveying the events, the history and the wishful and self-serving decisions made for us and by us that led to this mess you might want to take a gander at these two posts:
The Frannie Twins and You: Wall St., the Crisis and the Mess We Made http://tinyurl.com/3wexo8
Back to Stalingrad: Containing the Contagion, Moving Forward ? http://tinyurl.com/4aw5bj
The dangers here are that by blame-waving at the conspiracies we are in fact going to repeat the problems that got us into the mess in the first place.
Or you can keep on believing there’s simple answers for simple problems and we bear no responsibilities for any of this and neither do all the folks who had guns held to their heads to force them to make a chain of bad decision after bad decision.
What is needed is for gov’t, congress and fed to take a 2 year holiday and let the market sort this out.
Dblwyo. What is needed is for gov’t, congress and fed to take a 2 year holiday and let the market sort this out.
Larry,
Do you think that anything the Fed did last week will lead to an expansion of the money supply? I’m thinking that since the banking system is both broken and reluctant to lend that the only way the money supply could be rapidly expanded would be a method that operates outside of the banking system such as dropping money from helicopters.
I also find it amazing that the Fed, once again, did not even make a symbolic 0.25% rate cut as the global financial system was melting down.
Matt
Matt,
I think that the PPT wanted to shift gears from symbolic / band aid method to root cause / fix it right method. I am not saying they acheived that, but a 25 basis point cut was not the message that they wanted to send.
bob,
Thanks for the link to the chart of the Pakistani stock market. I just got around to watching Friday’s episode of Fast Money where they showed the chart. Pakistan obviously has more serious problems than the USA or China, or even Iraq, but I wouldn’t be surprised if our market followed the same pattern.
Matt
newbie,
After what happened last week, do you really believe that the PPT actually has any potency? The entire system was an eyelash away from melting down.
Matt
Both Jeff Macke and Karen Finerman of Fast Money admitted to being caught short and got killed during the big squeeze on Thursday and Friday. So I guess we now know why Macke is an ex-hedge fund manager…
Fast Money also had a studio audience and they seemed to be very cheerful. This reminds me of the period after the July low when everybody was relieved that the run on IndyMac didn’t spread to other banks. They don’t call it a “relief” rally for nothing, right?
So, I think the panic is over for now, and redemptions are likely to slow down as the masses think the authorities have fixed the problem. But the business cycle will continue to grind down and any rallies will be for shorting.
Zen,
Re: extend of the shorting ban. I am not sure if there is a big difference. The ban is on most of the stocks that were at risk. Unless RTC2 takes the bad debt off the books at a price well above the market value nothing has changed and the Pakastani chart seems to apply.
Dressguard, if RTC2 does have the tax payer fix banks balance sheets with very high evlauations of the debt then the banks HAVE bottomed. Yes, the economy will contracts, but the bank stocks have been CRUSHED because of the bad debt. Once the debt is gone the fundamentals point to rising stock values. Other opinions?
Matt,
Yes, after last week I think the PPT has earned a lot of respect / fear from the bears! In order to keep the respect they will have to follow through and take on the debt at awefully high evaluations. It makes me sick to think about this, and I am not sure it is possible from a political standpoint.
If they do not give outrageous evaluations of the debt then I agree that nothing has changed and I will agressively short them.
my $0.02
This board is great thanks to Matt and all the contributors
One last spam, I think the easier money is to wait for the POT etc. to roll over with the slumping economy. I made small, but record profits for me, buying PUTs when it made short terms tops at 180 in late August and 170 last week. The volitility on it is pretty high, so I keep the bets small. If, when, it does roll over I will make bigger bets.
I wonder if congress doesn’t approve this plan…. what will happen?
and i have to laugh at this headline.
http://www.commodityonline.com/news/Panic-effect-could-push-Gold-to-$4000-or-$5000-11770-3-1.html
i think if the plan falls through people will panic and gold could go back to at least $1000. i will find a gold stock and invest.
[...] think the restrictions on short sales, as pointed out by Shed, Matt, and Barry are going to end badly. I still am bearish over the [...]
Matt, I see your point. This new money might not find its way into the economy (at first), as you have alluded to before.
I follow the monetary base and M1 stats from St.Louis Fed. So let’s see what it looks like in a few months time. You keep an eye of that TMS you follow.
In the meantime and for the foreseeable future, we have a global credit crunch, de-leveraging and a recession. A recession that will now be prolonged by Hank Paulson and his buddies at Wall Street.