Yesterday by the narrowest of votes (3-2), the Securities and Exchange Commission voted to place limits of short selling of stocks that are declining in price. The limits would apply to any equity with a decline of at least 10% during a day’s session. Upon the 10% threshold is hit, short-selling shares of that particular stock would still be legal but only if the sale was at a price higher than the best did price available. For instance, if WXYZ was trading at 17 to 17.05, down 4 on the day, you’d have to short sell it above 17 if you wished to short the stock. SEC Chairwoman Schapiro intimated that the rule would push those who wish to short shares of stock in situations such as this to fall in the queue behind all of the longs who wished to sell their shares. She went to state that the primary impetus for passing such a change is that short selling can have a harmful effect on the market as well because theoretically a short selling cabal can push stocks artificially low which can cause a myriad of problems much less unnecessary panic. However, the counterarguments are many. This rule would halt legitimate short selling without good evidence any action was needed per se. Furthermore, the limited compromise may actually raise the voices of critics who would likely demand more restrictive actions should the market again come under selling pressure. Also, there will likely be a decrease of market efficiency as a segment of the people who wish to short stocks in these circumstances would be limited, price discovery would be limited, and less protection would be provided against upward stock manipulation as the rule won’t be applied the other way if a stock was up 10% or more on any given day. In any case, once the rule kicks n for a stock, it would be applied for the rest of that day’s session and the entire next day as well even if the stock price recovered. I have a number of questions which I hope will be formally answered in the next few days and invite any of you to comment on this piece and/or respond on the forum so I can send the questions on to the SEC. How long will it take to properly program software so that things don’t go haywire? If a stock has one bad tick in the pre-hours, does that trigger the 10%, i.e. if something is trading at 20 and 50 shares trade at 16, would that cause a problem? And of course, when will the proposal go into effect? Finally, what types of things will occur because of this for day traders? Forget liquidity…will a stock be artificially hammered if it is down 9% just because a few shorts want to enter before restrictions set in? Will things like dark pools pay attention to the restrictions? How about ECN’s not affiliated with the major exchanges? So, certainly watch the situation for coming changes in the next few weeks…much less hours.
Markets in Asia were down overnight with Tokyo down 1%. In Europe, there has been some turmoil in the currency market with the euro breaking down below 1.35 against the dollar while the yen gets stronger. There are all sorts of rumors that S&P may downgrade Greece’s debt in the next few weeks as Greece races to come up with debt austerity measures as the nation’s populace takes to the streets. The bourses are down only slightly as of this writing though. Futures state-side are getting hit following yesterday’s rally as the currency moves take their toll. Today is a day to stare at the euro-equity correlation. Focus on stocks in the news with earnings and deals at the forefront. Sectors moving will likely include techs and financials.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
CRM- good earnings
ESRX- great earnings
EXM- good earnings
GNK- decent earnings
TRLG- good earnings
PPO- great earnings
LTD- decent earnings
TQNT- decent earnings
CCE- selling North American operations to KO
GTLS- closed near a high after posting good earnings
FFCO- adopted plan of conversion and reorganization; closed near a high
VPHM- closed near a high after posting earnings
HRB- island reversal after posting bad earnings
SLXP- closed near a high after issuing positive drug data
DLTR- closed near a high after posting great earnings
TM- closed near a high after testimony from the company’s CEO
MIL- closed near a high on continued takeover speculation
AMZN- closed near a high
PCS- decent earnings
ESV- decent earnings
NEM- decent earnings
TRW- decent earnings
WT- decent earnings
IPXL- great earnings
NKE- on ‘Conviction Buy’ list at Goldman Sachs
DPS- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
ANDS- poor phase II data from ANA598 along with poor earnings
NTES- poor earnings
GDP- poor earnings
MALL- terrible earnings
GME- CFO resigned to take position at WMT
RIG- closed near a low after posting terrible earnings
FLS- poor earnings
DGI- poor earnings
TSL- closed near a low after posting earnings
PSYS- closed near a low after posting terrible earnings
HTZ- closed near a low after posting poor earnings
CFI- fell very hard in closing near a low on an analyst downgrade
KSS- poor earnings
MGA - terrible earnings
FWLT- lukewarm earnings
Earnings:
THURS FEB 25 BEFORE
ABG ANW BVF
CDE CLR CTCM
CTL CVC DLR
ESV FIG FWLT
HNZ HOC
IPXL IRM KBR
KSS LAMR LINTA
MGA MYL NEM
NIHD OCR PCS
PKD PXP SPW
SWY TRW WTI
WTR YSI
THURS FEB 25 AFTER
CROX DECK DRYS
FLR FTO GPS
GXP HANS INT
LEAP LHO MHK
NVTL OVTI SBAC
SD SQM SWN
SVNT TWB UHS
VIT WR WYNN
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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