Well, I have to say that these are the most interesting times that I have seen in the markets since I started trading, and that includes the Internet bubble, and subsequent bursting of it. Since my last post, we have seen the market (NASDAQ) basically in a descending triangle, recently breaking below the lower trend line.
After the Fed announced that they would cover the bad debt that occurred for a variety of reasons, and then that the financials could not be to be shorted, we saw a huge up day on Thursday, followed by another on Friday. I don't like what is happening, since the responsibility is being taken off of the true offenders- the banks, mortgage companies, and those who knowingly took on more debt than they could afford- the homeowners and speculators. What bothers me even more, is that the government and the broken banks are pointing the finger at the short sellers. I do have a problem with naked short selling- shorting when the shares are not available (but this is legal), and I will agree that there has been a lot of piling on of the shorts, driving the stock prices of the banks into the ground.
In my opinion, a better solution is to re-instate the uptick rule for shorting. I think that this would add some level of order to the selling, and get things back under control. The shorting did drive the stock prices down, which changed some of the credit ratings, so there is a correlation here. All in all, stopping the short induced bleeding was a good idea, and I do think that the uptick rule should be put back in place, as I mentioned above.
My concern is the basic buying and selling relationship of an orderly marketplace is being messed up. When you have shorts selling, you are providing shares to the buyers. Now that short selling is being restricted, it may end up setting up a situation where there are fewer shares for sale, artificially driving up prices, as buyers compete for fewer shares. Now, what happens when the shorting is allowed to happen again- do we see another down slide, or does order return to the market?
In the meantime, I am not trading this market unless I see some sense return to it. I can't allow myself to trust this rally, because the true issues have not been resolved.
Keep your power dry, and control your risk.
