What to Watch for in Today's Trading

Today will be a huge test of the new short-selling rules because we are starting from a higher plateau.

The brokers now know that it may not pay to short financials that have no mortgage exposure because they might rid themselves of it, and because they might not be able to get unlimited puts because the brokers won't provide them in fear that they will be caught without a borrow because major institutions are taking their stock out of the stock loan vault.

The specter of a total ban on shorting would make being short totally unpalatable. Make no mistake about it, a total ban on shorting, even a temporary ban on shorting would be horrible and destroy the markets outright. That's right -- destroy them.

I can expect that from this commissioner because he is that bad. (Did McCain just get my vote?) But anyone with any sophistication knows that if you can't short or hedge with shorting, you can't trust a market. It will break both ways, up and down. That has to be taken off the table. Almost all of the unintended consequences wreck whatever "good" it could accomplish.

But there is one unintended consequence that is wildly bullish. Today is options expiration and all of those who have sold calls or bought September puts are going to have to scramble huge to get their shorts covered lest they come in Monday and shorting is banned. You could see wild put-selling today and call-covering, some of which you saw yesterday.

It could move us to a higher plateau all day.

But make it clear that short-selling with plus ticks and with borrows is just fine with me. The current "legal" short-selling that has plagued us is about knocking stocks down. Unfortunately, the SEC wizards still don't understand the uptick rule -- more on that in a moment -- but now stocks have made up some ground and they can build on those gains if hedge funds can't just recklessly short without borrowing and brokerage houses don't recklessly provide liquidity to buy puts without checking first.

Let's use the case of Citigroup (C - commentary - Cramer's Take). This stock rallied hard, just like it did after the SEC decided to enforce the law after July 15. Now you can see how important, again, the enforcement is because even on the whiff of something that is good, the resolution mortgage trust, you can cause a short panic.

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