Market Bounces Back as Bernanke Promises Low Rates
By Robert Perrego, at 5:01 pm on February 24th, 2010Last week the Federal Reserve raised the discount rate to 0.75% sparking fears that the federal funds rate might be next in line for a hike. JP Morgan Chase & Co. (NYSE: JPM) gained 2.43% and Bank of America Corp. (NYSE: BAC) added 2.44% to lead the Dow Jones Industrial Average higher on the day. The market spiked higher just after 10 a.m. – minutes after Fed Chairman Bernanke began two days of testimony in front of a congressional panel. As Bernanke stressed that last week’s move did not mean the federal funds rate was going higher anytime soon, stocks responded strongly, pushing the DJIA higher by almost 90 points within 25 minutes.
The Dow Jones Industrial Average regained some of yesterday’s lost ground closing higher by 91.75 points (+0.89%, 10,374.16). The S&P 500 added 10.64 points (+0.97%, 1,812.51) and the tech heavy Nasdaq 100 led the three indexes, up 18.69 points (+1.04%, 1,812.51)
The finance sector responded strongly as Bernanke spoke and on news that key senators are opposed to limits on commercial banks making bets with their own capital. More trading news was made today as an SEC panel voted 3-2 to limit short selling on a down-tick on stocks that are down more than 10% on a day. The new rule would make short positions only able to be entered on an uptick if a stock is down over 10% from its previous daily close in one day, and for all of the next trading day. Quite frankly, this rule change is more for political cover for the SEC as they try to look like they are doing something. The markets dropped drastically last year and all of a sudden, people looking for someone to blame pointed fingers at short sellers and the SEC.
The Effects of Short Selling
Fact is, short-selling adds liquidity to the market and just like with any trade, if the short-seller is wrong they can lose money. An all to common public perception that short sellers cause stocks to go down too much is unfounded as there has to be a reason to bet that stock is going lower in the first place. Short sellers will put a short position on if they think the stock is too expensive. Some reasons for this might be that the company’s fundamentals are bad, the economy is headed lower or the stock has risen too far, too fast.
A way to think about short selling is; 1) Stocks are competing with each other for invest-able funds, and those that have better reason to be invested in get those funds and go higher, 2) Current investors in short-seller favored stocks may sell them to buy the more attractive stock, 3) The company that loses this invest-able funds ‘popularity contest’ are judged to be weaker and with no buying interest to counter-act regular selling, the stock goes lower, 4) On their own, short sellers would not be able to push a stock lower, as they have to ‘buy-in’ these shorts sooner or later, creating a ‘built-in’ demand for the stock. Only the sellers of ‘long stock’ can sell the stock and walk away. The short sellers have to be there to buy the stock back in and are nothing but future demand potential for that stock.
So if short selling cannot, by itself, make a stock go down, what is the SEC actually accomplishing here? As long as their is sufficient liquidity in a stock, short selling is not the reason a stock is going down. The SEC dropped the ball on policing ‘naked short selling.’ Naked short sales increase the supply of an issuer’s (company’s) effective outstanding stock, and is also illegal. A lot of people should either be in jail right now, or should have paid large fines made money on naked short selling over the past few years. If the SEC had done their job properly with the naked short sellers they would not be trying to save face right now by tinkering with legitimate short selling. Period.
New York spot gold dropped $6.80 an ounce to $1,096.70 (-0.62%, 4:30 p.m.) and Nymex crude regained the $80 a barrel plateau, up $1.31 to $80.17 a barrel (+1.66%, 4:23 p.m.). The PowerShares DB US Dollar Index (NYSE: UUP) dropped 0.20% (-$0.05, $23.76) and this throws a red flag. Gold dropped and is acting weak while the dollar is dropping, which says to me gold has internal weakness.
Looking at the chart of the SPDR Gold Shares ETF (NYSE: GLD) we see that it failed to take out the resistance level at $111 and has rolled over and traded down to $107.36. The stochastic oscillator looks to be topping out and rolling lower too. The GLD did break the downtrend line from it’s all time high and this is a positive. The next technical test for the GLD will be to see if it closes below $104 (twice in a row). If this happens we have a lower low and strong trading stocks do not do that. I suspect the ETF is going to trade sideways for awhile and consolidate. The GLD will head down to $104 and flirt with breaking it – if it breaks for two consecutive sub $104 closes that is a sell signal. If it holds and starts to head back up – buy more.
