Unbelievable: But not surprised

WASHINGTON (AP) -- Federal regulators on Wednesday imposed new curbs on the practice of short-selling, hoping to prevent spiraling sales sprees in a stock that can stoke market turmoil.

The Securities and Exchange Commission, divided along party lines, voted 3-2 at a public meeting to adopt new rules.

The rules put in a so-called circuit breaker for stock prices, restricting for the rest of a trading session and the next one any short-selling of a stock that has dropped 10 percent or more.

Short-sellers bet against a stock, in a practice that is legal and widely used on Wall Street. They borrow a company's shares, sell them and then buy them when the stock falls and return them to the lender -- pocketing the difference in price.

The SEC move followed months of wrestling with the controversial issue. The SEC asked for public comment last April on several alternative approaches to restraining short-selling, and a bipartisan group of senators have been pushing the agency to act or face legislation.

The agency got more than 4,300 comments on the issue.

Investor confidence was shaken as the market plunged amid the financial crisis in the fall of 2008, and proponents of restoring restraints said they were needed to prevent abusive trading. They maintained that the absence of restraints fanned market volatility, prompting hedge funds and other aggressive investors to target weak companies with an avalanche of short-selling.

But opponents said new restrictions could eliminate the benefits of short-selling -- bringing capital into the markets and accurate stock prices to the surface -- and actually hurt investor confidence.

Under the new rule, once a "circuit breaker" has been triggered, short-selling in the affected stock will be permitted only if the price is above the current highest bid for the stock. That restriction would apply for the rest of the trading session and the next day's session.

The SEC said the rule strikes a balance between two objectives: preventing short sellers from driving the price of a gutted stock even lower and preserving the benefits to investors from legitimate short-selling, such as pumping cash into the market. The balance comes, the agency said, because the "circuit breaker" restrictions are temporary and are applied to a specific trading session, in contrast to other alternatives that would institute permanent constraints.

"The reason this rule makes sense is because it recognizes that short-selling can potentially have both a beneficial and a harmful impact on the market -- depending on the circumstances," SEC Chairman Mary Schapiro said before the vote.

Schapiro said it is important for the SEC and the markets "to have in place a measure that creates certainty about how trading restrictions will operate during periods of stress and volatility."

But the two Republican commissioners, Kathleen Casey and Troy Paredes, disputed that the curbs would bolster investor confidence and said they could hurt the market's efficiency.

Casey said she was "deeply concerned" that the action seemed to be guided more by "public relations" than evidence of the benefit of the rules. It could "undermine our credibility in the long run," she said.

In July 2007, when the stock market was near its peak, the SEC abolished a 70-year-old uptick rule, put in during the Depression that followed the 1929 market crash that allowed short-sellers to come in only at a price above the highest current bid for the stock.

Last July, the SEC made permanent an emergency rule enacted at the height of the fall 2008 tumult that targets so-called "naked" short-selling -- when sellers don't even borrow the shares before selling them, and look to cover positions after the sale.

That rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Brokers acting for short-sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren't delivered within that time, there is deemed to be a "failure to deliver." Brokers can be subject to penalties if the failure to deliver isn't resolved by the start of trading on the following day.

What I Fear is happening

What I feared with the markets is happening. The continuation of the narrow range bound trading which ended 2009 continues for 2010. One thing is for sure, it won't last forever and when we do break either way it will be violent. I have my guesses but it is not prudent to guess but to wait for the break and trade as such. In the mean time it is safer to stay flat.

My favorite Analyst

Gas Prices

BORING

Can it be any more boring than today's trading so far. Very narrow range on everything

Last week

The surprise rate hike Thursday afternoon was good for an after hours trade down, but when the Friday's day session came, the market shook off the weakness, and finished the week with it's fourth straight up day. Option expiration was used as the excuse, but whatever the reason, the weakness was used as a buying opportunity.

As the chart above shows, we are now at a decision level for the S&P 500. Friday's trade smacked into the 62% Fibonacci retracement of the swing down from the high to low so far for 2010. If this retracement level does not hold as resistance, the next level up is the 78.6% Fib at 1128 (rounded up).

On the short term, we are overbought, and should watch for at least a mild pullback here, keeping in mind that the down move that started back in late January could be approaching its next leg. I'll be watching a gap up for a shorting op, then move to the first 30 and 60 minute brackets to watch for trend confirmation

Rate hike

It will be interested what will be said over the weekend with this surprise in the interest rate. Well it was not a surprise to me I mean how long are we going to be in a low interest rate environment without creating another bubble.
Oil on the move wow, I really guess I was spot on saying $71 area should be a bounce.

I have been programming all week and have gone to bed extremely late in the morning hours, so I am very slow to thaw in the mornings but nothing seems exciting here so let just watch the effects of the rate adjustment.