How do you spell short-selling rally, gentle reader? In this week's Outside the Box we look at several short items (pardon the pun) from various sources, which paint a not pretty picture. The first hit my inbox this morning from Art Cashin (of CNBC fame and also Head Floor Trader for UBS).
"Deconstructing The Rally - The sharp rally that sprang from the new short sale restrictions has been spiky and, in several ways, very powerful. The impact of the short rule change was evident. As Barron's notes, the 150 stocks with the heaviest short interest rallied a stunning 15%. The stocks with the smallest short positions rose only 2%. That may be a function of existing shorts scrambling to cover to pass the new, belated, scrutiny. That thesis got added weight from a couple of areas. The Merrill Lynch results got mostly panned by several analysts and TV pundits. Nonetheless, the stock closed 24% above its lows for the week. Also, the financial sector ETF rose nearly 25% from the lows.
"All of the above suggests that the rally is based on the two pronged government move. First, put a safety net under the financials, especially Fannie and Freddie. Second, restrict opportunities to sell the financials short. We'll wait to see if those efforts have further legs this week."