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Upticks? Downticks? What to make of it all?
Back on July 6, the SEC abolished the Uptick Rule, and the smart money waited to see the deluge of volatility hit the market. Well, here we are 8 weeks later and volatility is the name of the game. Do we blame the abolishment of the Uptick Rule?
For those that know the ins and outs of shorting the market, you probably know the Uptick Rule well. For those that don't, that's ok.
Shorting is an easy concept to grasp and the Uptick Rule along with it. Quite simply, shorting a stock is betting that it will go down. If you short a stock at $50.00 per share and it falls to $40.00 per share, you now have a $10.00 per share profit on paper. Think of it as one of Newton's laws of motion in the market: Every force has an equal and opposite force. Shorting a stock is the 180 degree equivalent of buying a stock in the the way we all know how, that is, long. I won't go into the specifics of how it works, but there are several online resources to get you locked on to the mechanics of shorting.
The Uptick Rule came about after the crash in 1929. The uptick rule stated that in order for you to short a stock, you could only do it only after that stock had gained in price, an uptick as it is called. It was felt that traders shorting the market in 1929 accelerated the crash, and the Uptick Rule was put into place to protect the market from those "bear raiders" looking to short a company's stock into the ground.
This rule, of course, did not protect us from the crash in 1987.
On July 6th, the Uptick rule was abolished, and with it, shorting became incredibly easier. It didn't take long for the blame game to begin when volatility hit the markets. In fact, I just read an article this morning regarding about this entire debate. Click the link below if you are interested.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070910/FREE/70910009
Short sellers have been long been the scapegoats of so called problems in the markets. This current market is no different. Despite all the things exerting a downward pressure on today's market (problems that won't go away with FED action), the last thing the bulls have to worry about is the Uptick Rule or the lack thereof. In fact, an argument can be made that all of these big gain days for the markets are because of short sellers since they engage in "profit taking" just like long buyers. When long buyers "profit take", the market goes down and when short sellers "profit take" the market goes up. The difference is that you will never hear a talking head thank a short seller for the market rally. Short sellers are portrayed as the Lex Luthors, Wile E. Coyotes, and Darth Vaders all wrapped into one. If the market has several weeks of losses, bet money that short sellers and the abolishment of the Uptick rule will be blamed.
While many SLO open players are betting that Tobin Smith was right about the market bottom on August 15th and 16th, I wholeheartedly disagree. My portfolio is loaded on the short side because I believe the market top has passed and the downward pressure will be realized in the next 12-24 months. September traditionally is a tough month, but I believe the long term trend is down and I will continue to stick to my plan of holding about 15% in cash until October. Once the post FED party is over and the downward force starts to take hold, I will look for the sectors damaged least by the overall downward trend, and plow the rest of my cash into them looking for those sectors to follow the overall market down.
For all of you bulls out there, here's a sobering thought. John Heine, a spokesman for the SEC said regarding the Uptick Rule, "We note that while we believe that current price-test restrictions are no longer effective or necessary . . ." If he only could have said "new economy", "the old rules don't apply here" or "new paradigm".
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