Market Could Have Formed an Important Bottom But....

I was going to do a post about how the market may have formed an important bottom today. The charts (technical reversals galore), the VIX spike and the sentiment (GS finally cracking, Gold skyrocket) seem to suggest that we will move higher for a while. I was going to post some charts and make my argument. That was until I read this news:

SEC Is Set to Issue Temporary Ban Against Short Selling

If this actually happens the the stock market will collapse, and maybe not recover. We will get a true financial Armageddon. This is the action of desperate fools. This proposed intervention into supposedly free markets will cause complete chaos because short selling has been a vital part of many aspects of the stock market. These are the effects I suspect that this rule would have:

1. Complete loss of faith in US financial markets due to incompetent regulators. Money will leave the US, investors will seek other unregulated assets (like physical commodities).
2. Liquidity will dry up, shorts provide shares to buy when everyone wants to buy and no one wants to sell. Shorts bid for stocks when everyone wants to sell and no one wants to buy. Market makers will no longer be able to function. Options (insurance) would not be able to be sold.
3. Those who are currently short would now have a very good reason to not cover. They won't be able to short again if they do.
4. No short covering rallies, stocks will just fall and fall as people loose interest and want to sell their investments.
5. Complete chaos, our financial system is built on a number of assumptions. One of them is that shares can be sold short. Everything will have to be re-evaluated, no one really knows what would happen if short selling was made illegal. Brokers will loose business, maybe some will go bankrupt. Will put prices go to infinity?
6. All the attention on short selling would distract people from the real problems, oh your know, the global recession and credit crunch.

I think this type of intervention would have exactly the opposite effect that the morons at the SEC think it would. The law of unintended consequences will be working overtime if this insanity actually goes down.

Fwiw, I am long, no shorts or puts here as of today. So I'm not saying this because I'm worried about loosing money on my bearish positions. In fact this news, if it actually happens, would make me more bearish than ever. I will certainly be exiting all my positions if this actually happens then I'm buying gold and burying it in my backyard.

The SEC chairman should not only be fired, he should go to jail.

Disclosure: Long GS, AIG, ICE, JASO, UNG, DBA

Well the crazy bastards did it:

SEC Bans Short Selling of Financial Stocks

What those idiots didn't know was that the market recovered ON ITS OWN today, and that without this crap we might have made a longer term bottom. Instead, the completely inept people at the SEC went into a panic and now we get to see what happens with their BIG experiment in Socialism. Will the system crumble tomorrow or will we collapse when the ban ends? I guess we will just have to see what happens. Capitalism is rapidly dying.