Three Stocks to Short

Good short sales were really tough to find in the broad recovery off the March lows. I understand that "a rising tide lifts all boats" in a bull market, but nearly every stock in my database moved higher during that period. This was unusual and even perplexing because all types of markets, at least until 2009, have generated their fair share of losers.

Many traders blame the SEC's temporary ruling to restrict naked shorting for the synthetic feel of the price action. The edict requires that borrowed shares be delivered "promptly," which translates to T+3, or three days after trade execution. In turn, this requirement has forced brokers to reduce their available short lists and call in shares that would otherwise be allowed to float over weeks or months.

Many folks, including myself, wonder if this rule and other stopgaps put in place in 2008 are keeping natural sellers on the sidelines because it's just too much trouble to sell short these days. As a result, we have a market that seems to drift higher after each downdraft, even though buy-side volume is unnaturally weak for this phase of a bull impulse.

The SEC is holding a public roundtable on Sept. 30 to discuss a series of proposals that will affect short-selling practices going forward. The changes could be relatively painless for private traders, like a resumption of the uptick rule, or the process could turn into a witch hunt that damages, perhaps irrevocably, the natural buy-sell structure of the financial markets.

A pre-borrowing requirement will be a major issue discussed at that important meeting. This bureaucratic nightmare would force the trader to go hat in hand and discuss the short sale, in advance, to ensure that available shares are sitting in a drawer at the broker's place of business. OK, that's an exaggeration but you get the idea.

This meeting will also address the industry's reporting requirements, including daily data, transaction information and twice-monthly failure-to-deliver reports, which addresses the notorious naked short-selling issue. Clearly, all the proposals being discussed will make it harder for the small fry to borrow shares, while giving the big boys a number of legal ways to sidestep the rules.