Over the weekend, I saw rumors floating around about the possibility of a ban on shorting bank stocks. My immediate reaction was: NO.
After thinking about it for another day, my reaction shifted to hell no.
I traded the markets during the 2008 financial meltdown when a short-selling ban on financial stocks was implemented in the equity markets. It did not have the intended consequences regulators hoped to see. Volatility increased, liquidity decreased and equities fell.
Short selling allows for price discovery and adds volatility to the marketplace. I'd argue the fallout in regional bank stocks would have been similar even without short selling. We saw a clear emotional panic in the markets. One could easily argue that the seized banks would have been seized at some point.
Don't get me wrong, I'm not in favor of all short selling. Naked short selling provides a clear path to manipulation. There's a reason why it isn't legal. That's not to say it doesn't happen, but it shouldn't. Unfortunately, enforcement doesn't always match current regulations.
Fortunately, it sounds like the rumors are simply that, but it would be positive if we saw Chairman Gary Gensler and the Securities and Exchange Commission ramp up action against illegal naked short selling. That's something everyone I know in the industry, including me, wants to see.
Speaking of short selling, Carvana (CVNA) , a stock with enormous short interest, has put together two strong days and broken above a key level of resistance.
Shares attempted their first breakout last Friday, but sellers overwhelmed buyers throughout the day. Monday saw the exact opposite, with an open near the low and a close near the high. While I saw $10 as a psychological breakout level, the $11 area sets up Carvana as a potential short-squeeze explosion.
Shares now sit well above the short-term 10-day and 21-day exponential moving averages (EMAs) and the 50-day EMA. If I added the 200-day EMA, you wouldn't see it on the chart. It's sitting around $26.62, more than double the current price.
I put resistance around the $13 level first, then closer to $15-$16. However, these are levels from early February, so there are not likely many traders from that time frame looking to get out at breakeven or for a small gain.
Under $10 makes this a tough hold. I would stop out under a $10 close, but if this market gets some momentum this week, I believe we could see multiple short-squeeze opportunities beginning with Carvana.
