What happens when CNBC TV says everyone & their brother is shorting the market? It means it is time for us to sell our position in the short ETF we own. And sell we did. We sold on the day (and within minutes) of the market low. Our short ETF gained in the area of 70% in the approx 8 weeks up to that point. Time to lock in gains in case a bear market rally arrives. It did in spades.

Why is this rally occurring? Here are some ideas:

  • Stock markets had taken a pounding in the previous 2 months, giving up approx 25% of their value. Major long term (multi-year) stock market declines are not straight lines. They are punctuated with violent bear market rallies that severely punish short sellers. We were due for a rally.
  • Lobbying for reinstatement of the uptick rule. The uptick rule was created by the SEC in 1938. This rule is used in stock markets to make short selling of stock more difficult. It does so by stating that a short sale trade may only be executed after the price of a stock trades higher (an uptick). Thus, this rule inhibits stock prices from trading down rapidly and in succession. The rule was dispensed with in 2007. Reinstating the uptick rule now may slow the decline in prices of stocks.
  • Relaxation of mark-to-market accounting for bank balance sheets. This effort has been under way for months, but succeeded last week. Keepers of accounting standards in the US amended accounting rules so that banks may be permitted to not value the troubled assets on their balance sheets at prices they are probably worth. That’s a nice trick. I’d like to be able to selectively pause accounting rules myself so I could value my house and other assets at much higher amounts that they’re worth. Then, when I feel like it, I could flip a switch and apply generally accepted accounting rules to assets I want to buy so I may buy those assets at market (lower) prices. Sound fair & reasonable to you? Me neither.  But it does have many traders excited about the prospect of our banks not appearing insolvent when they are in reality.
  • The G20 (world’s largest 20 economies) central bankers & finance ministers are meeting in London this week to discuss repairing the global economy. You can count on some pre-conference announcements by the various central bankers that will be good for stock markets. It is just like waiting for Santa Claus. This leads to my next bullet….
  • The latest reincarnation of the TARP. See article – Toxic yard sale.