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Tuesday, September 23, 2008

Short Ban? What Short Ban?

After the greatest PUMP in history, comes the greatest DUMP in history. That is how a pump and dump works. (Click the link. I promise, the irony of it all is just great.)

On Friday, in Disgusting Super Spike I wrote: “I don’t feel like posting today. I feel sick to my stomach.

After this, the markets will absolutely crash… and for the first time in a long time, you’ll see ‘NO BID’ in even the most liquid stocks after this squeeze sorts itself out.”

The Bank Index (BKX) was down over 10% yesterday. No, it wasn’t the financial terrorists commonly known as “EVIL SHORT SELLERS”. They were mostly banned. I say mostly because there is ALWAYS a way to get short. (More on that later.) It was the Bulltards getting out of their overly exuberant longs from Friday.

Perhaps the pump didn't last as long as expected... but the Bank Index (BKX) has retraced 100% of Friday's obscene move. This puts prices back below the declining 200 day EMA (green line) and just above the declining trend line (black line). I expect prices to drop straight into "the box" ($60 - $70).

The Regional Banking Index (KRX) retraced even more, losing over 13% from Friday’s close. The loss from Friday’s high is more like 20%.

The technical picture for KRX is better than that of BKX. The price is above all key averages (20, 50 and 200 day EMA’s) with the 200 day EMA actually having a positive slope. The regional banks are sitting on a CRE (Commercial Real Estate) bomb. Their balance sheets are set to absolutely implode. I personally can’t reconcile the technical picture with the fundamental picture. Therefore, I won’t touch the regionals…

I expect that we will soon hit the point where the longs try to sell in quantity and there are no bids from covering shorts to firm up the market. I expect prices to just absolutely melt then…

The pump ran into resistance around 1265 (Remember that level?) on the S&P 500 (SPX).

Prices are currently sitting on support around 1215. A confluence of moving averages should help a bit but I only expect a pause before the real dump.

The short selling ban is no such thing. The ban prevents the shorting of the cash equities on the banned list. However, futures contracts were never included in this ban. I for one, smashed the S&P 500 contract short on the open Friday. (Honestly, it was the scariest thing I’ve ever done. Shorting into lock limit up was freakishly nerve wracking.)

Suppose I was a super quant and I really really wanted to get short the banned financials. How do you suppose I go about doing that? Well, quite simple really. How about I short the entire market using the S&P futures contract and then go LONG everything I don’t want to be short via different equity baskets, ETF’s, options and swaps. This would leave me NET SHORT ONLY THOSE VARY SAME BANNED FINANCIAL STOCKS. (Granted, this is terribly inefficient, but it works.)

How long do you suppose it took for them there hedgies to figure that one out? You think they maybe poured over their models over the weekend and tweaked them real quick?

Furthermore, option market specialists have been exempted from the ban. This means I can buy puts in quantity while the specialist then goes out and shorts cash equities to hedge his exposure to the puts he just wrote me.

So what has changed? Not much really, except that it is a little more difficult and a little more complicated. Perhaps just difficult and complicated enough to keep Joe Sixpack from getting and staying short, but not nearly difficult enough for the professionals.