Goodbye Naked Short-Selling!

Trader Talk

The major stock indexes enjoyed a big rally today. The NASDAQ rose 3.1% on 2.5 billion shares and the Dow Industrials gained 2.5% on NYSE volume of 6.7 billion shares. The Leadership profile improved somewhat, still just 73 new 52-week highs as new lows dropped to 615, still quite negative.

The short term momentum oscillators are still negative, barely, confirming the bearish stance of the AlphaKing Trading Indicator. We have no new trades at this time.

Positive news from Wells Fargo this morning was the initial catalyst that drove the financials much higher today (on lower volume than yesterday's dip) as well as more testimony from Federal Reserve Chairman Ben Bernanke, who said Fannie Mae and Freddie Mac are well capitalized. Bear market rallies are sharp but short, and we're not convinced today's action in the market was anything to get excited about. In fact, it wouldn't surprise us if this move turns out to be just about over here.

1150 is our short term target for the S&P 500, where we plan to lighten up on our short positions, which should be followed by a larger sideways churn area. There is a slight possibility of a big drop from the 1150 area. The VXO and VIX fear indicators sank much today, and the Bulls in the AAII survey were only at 27% last week, while short interest in the NYSE was at record levels, much of it in the financials and homebuilding groups. SEC Chairman Chris Cox was on TV again talking about naked short selling, and the new enforcement policy, which may have had some effect. He explained that the rules will be enforced immediately in FNM and FRE, plus several major banks, but the SEC will not be concerned with past instances in which short-selling without borrowing shares occured. We're pleased that the SEC laid out a broader plan to later include all stocks. Short selling provides added liquidity and is not something evil. Naked short selling is illegal. Cox also said the SEC now has the tools to ferret out those spreading false rumors in order to benefit their positions, and they will use them. We applaud these long overdue changes.

Chief Trading Strategist Kevin Wilde returns from vacation next week.

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