Dividend Stocks in a Coordinated 'Bear Trap'

Yesterday's sudden drop in names like Northern Trust ( NTRS), Bank of New York Mellon ( BK), State Street ( STT) and Federated Investors ( FII) came out of the blue, but it couldn't have been scripted any better.

The panic about the safety of each company's money markets and balance sheets came on the heels of the previous day's story on The Reserve Primary Fund, which had dropped below $1. This fund dropping below a dollar is a very rare occurrence, and the heavy exposure to Lehman Bonds was to blame.

It can be said that the stage was set for shorts to bite on this story, and for several hours yesterday they did, seemingly ignorant of the punishment that was soon to come their way. First came the U.K. story on banning the short-sales of financials, and then came the slowly released news bites from beleaguered companies that everything on the balance sheets was still in good shape. Finally, you had news of the new "Resolution Trust" that got the spike really going.

If you are a short-term investor or hedge fund manager, you now have to think 4 steps ahead. The minute the short-selling ban news came out of the UK, you needed to start scaling out of the trade. Did you expect State Street to go from $66 to $1, and as well BK, NTRS, and FII to also go to zero in one day? The hint we were given was that the market should have been down 500-1000 points when these stocks were getting pummeled, but we were barely down 150. The timing of this trap, and the way it was set, from a market's standpoint, was as good as it gets. If you like the short side of the markets, you better know how to time things or you will not be around for very long.

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At the time of publication, the author had no positions in stocks mentioned, although positions may change at any time.

Tom Reese and Paul Rubillo are senior editors of Dividend.com. Visit Dividend.com for more dividend stock ratings, picks, news, and analysis for long-term and income-seeking investors.