The ban on short-selling of high-profile financial stocks has prevented bear-market rallies and an extension of the ban would be a 'big mistake,' Kirby Daley, senior strategist at the Newedge Group, told CNBC Wednesday.
Short-covering of stocks, which is where investors buy stocks to pay back their loan, was the cause behind numerous rallies in the months leading up to the ban, but now they aren't happening anymore, Daley said.
"Let's just hope that the regulators keep cool heads and do end the ban as they say they will at the end of the day on October 8, but I have a feeling it might be extended, that would be a big mistake," Daley said.
(Watch the accompanying video for the full interview with Kirby Daley...)
“The rallies that we saw in the months preceding this recent devastation were largely caused by a 'fally'—which is a fallacy that makes investors think that the market should rally—and then short covering would ensue," he explained.
"So by banning short selling in most of the stocks that short selling was taking place and where the rallies would really lead the market, you took away the short-covering rally as well,” Daley added.
Investors should not hope for a v-shape recovery, as the markets are still looking for a bottom and once they reach it, they will stay there for 12 to 18 months, he said, warning: "don't jump in and start buying."