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What to Expect From the Ban on Short Selling


BaFin's actions caused the euro to fall with the S&P and gold to rally; what does Germany know that we don't?

Yesterday we were reminded of September 19, 2008, the day that the SEC banned short selling in financial companies because the agency wanted to "protect the integrity and quality of the securities market and strengthen investor confidence." A year and half later we know how the story ended.

Yesterday afternoon Germany's BaFin financial services regulator said that starting at midnight the country will introduce a temporary ban on naked short selling and naked credit default swaps of eurozone government bonds. According to an emailed statement from BaFin, the ban also applies to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011.

As the news broke yesterday the euro started to fall with the S&P 500 and Gold started to rally. The biggest question facing market participants this morning is, what does Germany know?

As of this morning, we're still not sure. According to the statement issued by BaFin the ban was introduced due to "extraordinary volatility in debt securities by eurozone countries."

I hope Germany is happy because all it has done is create uncertainty in the market as traders are left scratching their heads as to what the next shoe to drop will be. Will other eurozone countries follow Germany's ban?

Buckle up and expect "extraordinary volatility" over the coming weeks.

How to Play It:

To state the obvious, risk is high and the market is uncertain right now. The market seems to believe that the gold trade is a "fear trade," so when risk creeps back in Gold works. Gold is more a play on the failure of all concerns but I don't think the market has realized this yet. Those looking for portfolio protection could consider the Gold ETF (GLD) here.

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Those who are bearish on the Euro could consider going short the Euro ETF (FXE). I would caution to only do this trade on rallies like we saw yesterday. For those looking for an Ultra Short ETF to play consider the Ultra Short MSCI Europe (EPV).

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