Stocks Swoon on Chinese Short Selling Rule

While you were enjoying spring and the NHL playoffs (go ISLES!), Chinese regulators decided that the stock market there is getting a bit too frothy. In fact, the main Chinese stock market index has doubled over the past year, which prompted regulators to make it a bit easier to bet against companies by selling short. Short sellers believe that a company’s stock is overvalued. To profit from that decline, the investor has to borrow a stock that she does not own from a brokerage firm. As an example, if XYZ Corp is currently trading at $100 and you think it’s going down in value, you can borrow the stock at $100 per share from your brokerage firm. With that borrowed stock now in your account, you can sell it for $100, with the expectation that when the stock drops, you can repurchase at a lower level. Let’s assume that you are right and the stock falls to $80, you can pocket the $20 when you return the shares to the brokerage firm.

Now back to that Chinese rule change, which on Friday, sparked fears that investors would immediately enter sell orders in China; and that the selling there would spill over to Europe and the U.S. It should be noted that short selling has been around for a long time here in the U.S. and its presence has not prevented markets from rising. But in a week that lacked any market moving economic reports and it being too early in earnings season to declare victory or defeat, the bears took charge, at least temporarily.

This week, Greece will be front and center, as European officials try to bang out a deal for debt repayments, which are due in May. It will also be a busy week for earnings, with Amazon, Facebook, General Motors, Proctor & Gamble, Boeing and Morgan Stanley reporting. Of the 59 S&P 500 companies that have reported so far, nearly 75 percent have beat profit expectations, but revenues have fallen short, with more than half of companies missing estimates.

MARKETS:

• DJIA: 17,826, down 1.3% on week, up 0.02% YTD
• S&P 500: 2081, down 1% on week, up 1.1% YTD
• NASDAQ: 4,931 up 1.3% on week, up 4.1% YTD
• Russell 2000: 1231, down 1.7% on week, up 3.9% YTD
• 10-Year Treasury yield: 1.85% (from 1.95% a week ago)
• May Crude Oil: $55.74, up 7.9% on week
• June Gold: $1,203.10, down 0.1% on week
• AAA Nat'l avg for gallon of regular Gas: $2.45 (from $2.39 week ago, $3.67 a year ago)

THE WEEK AHEAD:

Mon 4/20:

IBM, Morgan Stanley, Haliburton, Hasbro

Tues 4/21:

Verizon, Yahoo, Yum Brands, Chipotle, Kimberly Clark

Weds 4/22:

Boeing, Coca Cola, McDonald’s, AT&T, Facebook, eBay

9:00 FHFA Home Prices

10:00 Existing Homes

Thurs 4/23:

3M, Amazon, Google, Microsoft, GM, Procter & Gamble, Starbucks, Pandora

10:00 New Home Sales

Fri 4/24:

Biogen, American Airlines

8:30 Durable Goods