Tuesday, March 10, 2009

3 Reasons Bringing Back the Uptick Rule Is Pointless

Word is crossing the wires that Sen. Chris Dodd (D-Conn) and Rep. Barney Frank (D-Mass.) are in support of bringing back the uptick rule. This news may be contributing to the market’s big pop today, but I am skeptical that it will have much of an impact on the market.

First, traders already have access to leveraged bear ETF’s like the Direxion Financial Bear 3X Shares (FAZ). This particular ETF, and others like it, trades tens of millions of shares a day and provides an easy way to bet against the market without having to engage in a short sale. The sheer trading volumes of the bear ETFs suggests that short-sellers (and hedgers) are increasingly looking to these instruments to benefit from market declines.

Secondly, reinstating the uptick rule does not change any fundamentals. It is merely a change in market mechanics, and one that favors long investors. Many pundits blame shorts for knocking down financial stocks, but conveniently fail to acknowledge the impact of huge mutual funds dumping financial stocks on the market. The economy will not change because of a rule change, and neither will General Electric (GE), Bank of America (BAC), or Apple (AAPL).

And finally, recent history does not indicate that market intervention to influence price action works. Remember OPEC cutting oil production back in October? Or the banning of shorting financial stocks?

Bringing back the uptick rule will not help the market. We will still see volatile action on a day-to-day basis, but investors should remain focused on the usual stuff – fundamentals, technicals, sentiment, etc. The uptick rule does not change any of these items.

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This just in - I am watching CNBC right now, and a commentator claims that bringing back the uptick rule will draw buyers back into the market. This is just plain ludicrous – have you ever heard of anyone pulling their money out of the market because of the uptick rule? Or refusing to buy because of the absence of the uptick rule?

Come on.

What do you guys think?

1 comments:

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