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Global News and Fundamentals

Will a Ban on Short−Selling Help the Dow?

Fri, Sep 19 2008, 09:58 GMT
by Andrei Pehar

fxKnight.com

The SEC just released a list of 799 financial firms on which they have forbid short-selling, mirroring a similar move made yesterday by the UK's FSA.

The complete list can be found here: http://www.sec.gov/rules/other/2008/34-58592.pdf

But will such a move really help the markets?  In the short-term, we can see it already has.  People with little understanding of the markets are already rushing back in, thinking that somehow everything is more "safe" as result.  In reality, most of the recent drops we've seen in the share prices of financial firms were due to regular shareholders sensing danger and getting out, not short-sellers (and for every seller there is a buyer, don't forget).

Longer-term, quite the opposite is true.  Short-sellers (ie, hedge funds) provide much-needed liquidity for the markets, especially at a time like this.  Also, with price no longer representing fair value, the potential for even greater vacuums and bubbles is created.  We may have postponed a "crash" (technically, October 19th of 1987 received that label for a move over 500 points on the Dow - and we've already exceeded that), but are we increasing the chances of an even larger one down the line?  And, perhaps more importantly, are these the first signs of a move away from free and fair markets?

The effect of this move by the SEC on the Dow was swift and sudden.  However, prior to it, two key support levels (at 11362 and 10813) had been broken.  What remains to be seen in today's session (and perhaps throughout the following week) is whether 11362 will now act as resistance or not.  If so, we may move back down to test 10813 once more as support.  If that gives way, a target at 9924 comes into view.

Markets are also eagerly awaiting the details of Secretary Paulson's plan to repurchase the remaining bad mortgage debt out there, which will likely lend further support to the markets.  If we an get above 11362 (and stay there), then perhaps our worries are over.  For now.

Published on  Fri, Sep 19 2008, 11:23 GMT