by ilene - October 22nd, 2009 1:45 pm
Karl Denninger presents a compelling argument that market makers should not be exempt from rules preventing short-selling shares that cannot be borrowed (naked short selling). Because the quantity of a given stock in "float" is fixed, traders and market makers should not be allowed to create unreal and illogical bets on stocks that result in perversion of market dynamics and wild price swings. That’s my summary, Karl explains in detail. – Ilene
Courtesy of Karl Denninger at The Market Ticker
Matt Taibbi once again writes in Rolling Stone, this time on naked short sales, and while he gets a good part of the issue right, he (and many others who have opined on this situation over the years) miss the forest for the trees.
Matt writes:
But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear’s mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman (GS). Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")
Matt gets so close, but fails in the closing.
See, there are two area of naked shorting that nobody wants to really deal with, yet both have to be if we are ever to make a difference. Let’s deal with them in turn.
The first, the writing of "naked" swaps, is one that I’ve written about before. The essence of a "credit default swap" is a contract whereby the buyer of protection insures…
Tags: bear raids, Bear Stearns, Credit Default Swaps, Fraud, Insurance, Karl Denninger, Matt Taibbi, naked short selling, Rolling Stone, short squeezes
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by Chart School - October 12th, 2009 4:39 pm
Courtesy of Corey at Afraid to Trade
I wanted to give an updated look at the recent post entitled “If History Repeats, Will it Mean New High for S&P 500?“ As we see today, the answer is overwhelmingly “yes” as I suspected would be the case when I wrote that post on October 6th.
Let’s take an updated look now that ‘history has indeed repeated’ and also step inside the three most recent “short squeezes” on the SPY and S&P 500.
Starting with an updated look at the SPY Daily chart:
In the prior post, I mentioned that the pattern looked eerily similar to the prior “surprise” rallies that were fueled in part by short-covering (buying pressure to exit positions with losses). The yellow highlighted regions reflect the “short squeeze” while the red regions represent valid and classic short-sale signals (be they from momentum or volume divergences, and/or breaking beneath the 20 day EMA).
These ‘failed sell signals’ started with the July ‘breaking’ of the widely publicized Head and Shoulders pattern which led to a massive short-squeeze (so many people were 100% convinced the market was going to break to new lows from this pattern).
From there, buyers have invalidated (or busted/broken) three additional short-sell (swing trade) signals, resulting in snap rallies to break to new 2009 highs each time.
Let’s step inside the highlighted zones above and see them on a plain 60min chart:
(Click for Full-Size Image)
Not only were there valid divergences, but there were large downside (morning) gaps and strong selling days that preceded the reversals to the upside, which tells us that shorts were entering positions, and as the market -for whatever reason – began to reverse, an “avalanche” occurred as prices rose, which triggered out stop-losses and drew in fresh buyers.
Notice the swift upside gaps and strong up bars in each of the highlighted regions, especially the current region which began on October 5th.
What is the implication?
As I mentioned in the previous post, odds strongly favored a retest or breaking of the 2009 high which occurred today (a re-test). Should price continue to nudge slightly higher beyond $108.03 in the SPY and 1,081 in the S&P 500, then we will see more short-sellers be stopped out which will create further upside ‘bursts.’
This is…
Tags: failed signals, rally, short squeezes, SPY Chart
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by Chart School - July 22nd, 2009 11:56 pm
Courtesy of Jesse’s Café Américain
Some short term indicators are flashing that we are nearing at least a short term top. There is also indication of distribution of stock here by insiders to the public, which is also an indication of a possible top. This judgement is based on many charts and indicators not shown here.
Having said that, our discipline will not prompt us to do any seriously non-hedged shorting until the ‘trendline’ Key Pivot is violated at least on a daily close, and then confirmed by a move lower.
The market is rising on thin volumes, and unless the sellers come back in, it can continue to drift higher on program trading and short squeezes.
We are within two weeks of a potential ‘crash window’ where a final top will be made, and a selloff with a significant leg lower will be seen into the end of year. The window is a bit wide for now, a six week period starting around August 17th. We will hope to tighten that up by the end of July.
This is only a probability, not a hard forecast. But it has us edgy to be on the long side, even in precious metals miners, without hedging a general market decline. The Cashflow in the market is looking a bit stretched. We may have to wait until later in earnings season for this to shake out.
In sum, the markets seem ‘precarious’ and unstable to us, but not enough to jump in front of the market to the bear side yet.
As an aside, we are seeing quite an increase in ‘screwy fills’ on the bid ask level II where fills on the retail side seem to be made ‘out of bounds’ of the usual bid/ask action.
We do not use market orders normally and would not suggest them here for those that do. The market makers are shaving fills and front running perhaps although that is harder to spot except on the thinly traded stocks where other issues may come into play.
But we are seeing far too many fills BELOW our limit bids on some stocks to believe this market is functioning normally.
[Click on chart to enlarge]
Tags: program trading, sellers, short squeezes, Short term indicators, volume
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site