They Have To Blame Someone!

April 20, 2009 — 1,423 views  
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Have you ever noticed that a day does not go by without the media pointing to a reason why the market traded higher or lower on a particular day? According to the media, there is always a reason for a move higher or lower. As a technical trader we really do not focus on the why or the so called reason for a move in either direction. Rather we focus on price action, pattern, and time. Using these techniques is like getting tomorrows newspaper today.

Many talking heads in the media and in charge of regulating the markets are blaming the short sellers for the recent bear market. First of all short selling is a very good and fair way to trade the market. In order to short a stock the individual or institution must borrow the stock from their broker and sell it. Later the trader must buy back the stock or cover the trade. If the stock is below or lower than where the trader sold the stock, then a profit is made. If the stock is higher from where the trader sold the stock then the trader incurs a loss. Short sellers are a necessity for the market to function in a correct manor. The irony is that short selling is not permitted in IRAs, 401k's, and most retirement plans unless a short fund or ETF is purchased. In fact, a majority of the public does not even know what short selling is.

There have been numerous CEO's and so called market mavens that say short selling should be banned and blame the short sellers for stocks going lower. Did this save the financial stocks in September and October 2008 when the regulating bodies banned short selling on countless financial companies? The answer is a simple NO! Stocks still declined and a case can be made they fell even faster than they would have, had the ban not been put in place. Why? Because short covering as a stock falls is buying pressure. In fact the former SEC Chairman Christopher Cox said he regrets his handling of the financial crisis and in particular the banning of short selling financial stocks. Chairman Cox told Reuters, "the costs (of the short selling ban on the financials) appear to outweigh the benefits.

Here is a small piece by Peter Boockvar of Miller Tabak regarding short selling that I feel must be shared with the investing world.

"My 2 cents on the SEC talk on altering the short selling rules:

Short sellers (SS) didn't get people to buy homes with no money down, SS didn't convince people to buy homes with teaser rates, SS didn't convince people to lie about their income on their mortgage applications, SS didn't tell banks/brokers to lever up to such huge levels, SS didn't tell Greenspan to cut rates to 1% and leave it there, SS didn't invent FNM and FRE, SS didn't tell the OTS, OCC, FDIC, Fed, SEC, FFIEC, FTC, FHFA and all the state regulators to twiddle their thumbs all day, SS didn't tell the rating agencies to rate AAA on anything that moved, SS didn't tell banks to lend to commercial real estate investors on a property where the rent didn't cover the mortgage payment, SS didn't tell the average consumer to spend more money than they make and borrow the difference.

Short selling is a legitimate form of speculation that fully enhances market liquidity and price discovery."

Source: Nicholas Santiago
The Leader In Market Technical Guidance