Today was a strong down day for the market. As I mentioned in an earlier post, after such a strong fearful sell off like the one last week volatile trading is not uncommon. It takes a while for extreme emotion to settle down. Markets do not heal quickly after such a extreme move. That has been my observation when the market has seen similar declines. I would not be surprised to see us test and perhaps go below the low of 110 on the SPY (see above chart) and then trade sideways for some time, before this market gains some upside traction again. I do not know the future. This is a possible scenario, based on the price action in the market. Overall the evidence in the price action seems to point to a volatile difficult trading environment. In my opinion this type of market is more suited to very short term traders (day traders), and that style probably does not suit most people (myself included). It may not seem like it now, but the trading environment will eventually improve. Markets are always changing.
I also wanted to comment on the ban on short selling in Europe. I feel that this is a misguided and perhaps desperate move made by regulators that really do not understand financial markets. Europe's economic troubles are not caused by short sellers.
When one buys a stock in company XYZ to go long the only effect they can have on the stock price after they have bought the stock is by offering their shares by selling. This actually puts some downward pressure on the stock price, because they are increasing supply at the market price and if demand does not meet the increase in supply the market price goes down.
When one shorts a stock in company XYZ the only effect they can have on the price after they have borrowed shares to short is by buying the shares back. When they choose to do that they are increasing demand at the market price and this puts some upward pressure on the stock price of XYZ.
This may be a slightly simplified example, and I am only using market orders in this example. The point is that markets are made up of millions of participants making individual personal decisions throughout the trading day. It is far to complex for a bureaucrat to try and manage.
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