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SEC Uptick Rule

Written By Brian Hicks

Posted April 7, 2009

It was March 17 when we recommended jumping into financial stock options ahead of mark-to-market news.

And we were spot on.

We played speculation prior to the announcement, news of the announcement, and the dissemination of news. And those of you who followed the advice had the opportunity to bank more than 160% gains as news of relaxed mark-to-market news hit the wires.

You see, we knew that within three weeks of the Financial Accounting Standards Board (FASB) announcement before the House, we’d see new mark-to-market rules. Either the FASB was going to make the change, or lawmakers would force legislation changing the rule that has forced banks "to write down billions of dollars in assets."

And, just as expected, the changes came.

According to Steve Christ, editor of The Wealth Advisory, "the changes will now allow banks and other financial companies to use ‘significant’ judgment when gauging the price of some investments in their books, including mortgage-backed securities. So, after being handcuffed by the rule, the banks are now free to sort of make it up as it suits them."

It’s why we expected the run up in financial stocks. We simply went bottom fishing, knowing the new rule changes could boost bank net income by some 20% or more in the future.

But that’s old news. . .

Now, it’s time to move on to why financial stocks and the broader market could rally hard this Wednesday.

Will the SEC Bring Back the Uptick Rule?

The uptick rule was put into place the last time the market was badly beaten, suffering from extreme volatility and possible market manipulation. That was 1938. And the rule required shares of stocks to move upward in price by at least a penny before they could be sold short. It was also designed to prevent the legal manipulation of stocks, bear raids, and restore market confidence.

Thirty-nine years later, under the SEC leadership of Chris Cox, the rule was abolished as the overall market peaked and as the SEC "sometimes leaned toward easing of regulations". . . just as we would soon need it the most (the confidence part of it, at least).

But come this Wednesday, after months of deteriorating conditions, the SEC is expected to jump-start the market temporarily and bring some confidence back to trading. That’s when they’ll announce proposals to begin restricting short trades, or the practice of borrowing stock in hopes that share prices will decline, which have been blamed for accelerating declines in the market.

And if the SEC won’t make the change then Congress should, according to a letter written by Sen. Ted Kaufman and Sen. Johnny Isakson which stated if the SEC "fails to signal clear action. . . then Congress should do it itself."

Don’t get us wrong. Legitimate short selling does play an essential "checks and balances" role in the marketplace. It provides checks on overbought prices. The uptick rule would simply prevent short selling from becoming manipulative. Reinstating it would simply help balance out the market and, hopefully, cut back on severe price pullbacks.

Be sure to buy ahead of the SEC news this Wednesday. We’re looking to play the news and the dissemination of the news with this one.

Good Investing,

Ian L. Cooper

Editor’s Note:  If you’re among those who want Wall Street’s crooks brought to justice (and I’m not talking about some posh country club prison), you’ll be interested in my new report. In it, I show how to enact revenge on Wall Street’s most nefarious villains… by making yourself a quiet fortune. It’s the ultimate revenge, and it’s all in my new report, which you can find right here.