Equities attempted another late day rally on Wednesday afternoon at about 2:40 PM, and watching the movements of individual stocks, we noticed an interesting trend. From 2:40 through the close the average stock in the S&P 500 rallied by 0.42%, but not all stocks participated equally. We saw that several stocks with high levels of short interest had better gains than the overall market. Then when we divided the S&P 500 into deciles based on levels of short interest (as a percentage of float), we found that the three deciles containing the stocks with the highest short interest levels saw the greatest gains. While each of these three deciles had returns of nearly twice the average stock, only one other decile managed to even put up above average returns during the same period of time.
Interestingly, two minutes (2:38 PM) before Wednesday's rally led by the most heavily shorted stocks began, the SEC announced that they were charging TJM Proprietary and Hazan Capital Management with violating the locate and close-out requirements of Regulation SHO. In plain English, the SEC was charging these firms with illegal short sales. While other factors may have been at play, the fact that the most heavily shorted stocks led a market bounce only seconds after the SEC's actions provides compelling evidence that many traders are coming to the realization that the current SEC will take a much more active role in pursuing illegal short sale activity.
So scary. Maybe the SEC shoulda stopped befolre they were outmatched in the first place.
Posted by: johnnysize | August 07, 2009 at 08:26 PM