Trader Talk

Are the Wild Price Swings Over?

Is it over yet? Are the wild price swings over, so we can go back to our August vacations?

I wish it were, but I don't think so. Consider:

1) the headline risks from Europe. Everyone is expecting some kind of positive comment out of the Merkel-Sarkozy meeting on Tuesday, and after that there will be votes coming on the Greek bailout and the EFSF expansion plan from all the eurozone countries, starting with France August 31.

2) the trajectory of the fundamental numbers are not good...consumer sentiment, French GDP data, eurozone industrial data

3) credit spreads are still wider

4) the ban on short selling (in various degrees) in France, Italy, Spain and Belgium. Why is this a risk? Because bans on short selling don't typically get rallies for a few days and then do poorly, because short selling requires that you (eventually) cover your short by buying back the stock. That "short covering" can act as a powerful stabilizing force.

This from a trader: stats from the 3-week short sell ban on financials from 2008 show that the S&P 500 fell from 1206.51 on September 18th, 2008 (the day before the ban) to 984.94 on October 8th (the last day of the ban). This amounts to a decline of 18.36 percent in three weeks.

In the same time period, the XLF , which tracks the financial stocks, declined 23.64 percent. So in fact, the stocks that had the ban fell more than the stocks that didn't.

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