Over reactions work in both directions
Fridays rally has caused the worms of ignorance crawl out the woodwork. The short ban co-inciding with a huge rally must mean that shorts caused the markets to sink? The beauty of correlation causation fallacy.
Most of the ignorance is coming from the UK where the FTSE was up nearly 10% at one point. What these people fail to realise and research is the FTSE futures and the fact that the UK markets close before the American markets. Americans can trade ADR’s for UK stocks after our markets have closed.
When the FTSE closed at 4884 on thursday the DOW was trading at ~10620. When the dow closed thursday it closed at 11027. The FTSE and Dow have quite a strong 2:1 point relationship. If the dow moves 2 the ftse moves one. This is not absolute on a minute by minute basis but it is a general rule I use.
When the DOW closed on thursday FTSE futures closed at 5080. That is almost perfect 2:1
The FTSE closed friday @ 5310 +8.84%. The real FTSE rally from shot banning is only +4.5%. Still impressive but there are more factors to weigh in.
On thursdays news of the bank bail out American investors could cover their short positions. On friday on the news of the short ban they could also cover. For the UK it was different. All that news came in one go. All investors wanting to cover will have had to cover in the same trading day. Heavy short covering means buying. These two factors gave sellers a unique opportunity. The big boys knew they had an amazing opportunity to squeeze a huge amount of shorts.
Just as a market collapses if they are no buyers it bubbles when there are no sellers. Check friday volume for financial stocks. Lowest of the week for most. This includes the huge option blocks that go through too. Lowest volume of the week on quad witching day? That doesn’t sound like a liquid market to me. Liquidity is the problem in the markets too. So what has banning shorts achieved? It’s killed the last source of market liquidity.
There is a hate for shorts. Thing is it is not their fault. If people were buying stocks and the stocks wouldn’t go down. No one wants to buy junk bank stocks though. Everyone is sitting and holding hoping for the best. AIG LEH BSC have all shown us you can end up with next to nothing. The rest of the financial sector is not faring much better than nothing either.
EDIT: It’s monday today and what is happening to financials? They are sinking. Oh what a surprise. But how is this possible with short selling banned? Maybe it is because shorts are only a fraction of the market?