Gap Open Reversal

by Larry Levin

The market gapped open quite a bit higher this morning, with the Dow in the green by 90 points. By the close, however, the Dow was down over 100 points. Considering the year long melt up on no volume, this is a surprising change.

The causes of the reversal are many: Greece debt was downgraded again, a former European central banker said Greece will NEVER repay its handouts, and there is a lot of rumbling in Germany. Germany wants to "punish" speculators by making the following changes.

Keeping to form the way all politicians do - Germany is addressing the symptom and not the disease: too much DEBT.

The following is from zerohedge.com http://www.zerohedge.com/article/germany-ban-short-selling-midnight and explains some of it.

Reuters headline for now, that the German Finance Minister will institute a short-selling ban at midnight. If true, this is huge, as it means the market will become massively dislocated once again. We can show charts of how Thailand, US and Greek markets reacted when this was introduced (short jump followed by significant slide lower), but you get the image. One wonders just how horrible the news flow over the next 24 hours will be for this drastic measure to be introduced.

Full and most recent Reuters update below:

BERLIN, May 18 (Reuters) - Germany plans to ban naked short-selling on stocks and euro government bonds, German all-news network N-TV reported on Tuesday.

German coalition sources told Reuters earlier that Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight.

Economy Minister Rainer Bruederele told Reuters that it was possible the short-selling ban would be quickly enacted.

No other details were immediately available.

Update: short selling ban will apply to stocks and euro government bonds according to German N-TV station. This is an act of desperation and will force all those who are long German assets to sell asap (selling is still legal).

Update 2: Bloomberg chimes in quoting Deutsche Presse which reports that the ban will only apply to naked shorting. We are looking for official confirmation on what the final proposal will look like as there is a lot of confusion currently and no formal announcement. Regardless, investors are wondering what has changed today to institute this now.

Update 3: Hearing naked ban will also apply to credit derivatives, i.e. naked CDS.

Update 4: Merkel to formally announce naked short-selling ban on Wednesday.



Previous Day's Trading Room Results:

Trade Date: 5/18/10

E-Mini S&P Trades*
(before fees and commissions):

1) OTF sell @ 10:33am at 11390.00 = +3.50 & +3.50 (2 lots)

2) 80% sell @ 11:45am at 1135.25 = -1.50 & -1.50 (2 lots)

3) Algorithm positions (13)

4) “Reading the Tape” positions (34) …combined Secret’s, Algo, & “Reading the Tape” total +27.00



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