The temporary ban on bearish positions may slow the stock market’s collapse in the short term, but it is not a panacea in a market that has been greatly weakened by uncertainty about the Covid-19 pandemic.
The CNMV decided on Thursday night to ban short sales on 69 Spanish listed companies. The measure, limited in principle to yesterday’s trading session, was adopted after the Ibex sank 14% on its worst day in history, and that 32 of the stocks that comprise it exceed 10% drop in a only day. The supervisor activated this extraordinary action, which was also carried out by his Italian counterpart, “taking into account the evolution of the stock markets in the context of the situation created by the Covid-19 virus and the risk that movements of disorderly price in the European stock market, including the Spanish one “.
The Ibex closed yesterday with a rise of 3.74%. A discreet result if you consider that it bounced 11.73% at the best time of day, but more than enough to stop the bleeding. Analysts and traders, for the moment, are content with little given the delicate situation of the stock market.
Undoubtedly, the temporary ban on shorts helped neutralize the bearish movement. Many in the market had been wondering for days why the CNMV did not do it sooner. European supervisors are empowered to restrict this operation “when the price of a financial instrument on a trading platform falls significantly in a single trading day from the closing price on that platform on the previous trading day.”
10% is considered significant in the case of a liquid share, which is all of the Ibex. ACS, Sabadell, Santander, Bankinter, BBVA, Mapfre and Repsol exceeded that level of losses last Monday. And another ten values of the selective came very close to that percentage.
Experts say that it is not desirable to intervene in the free functioning of markets, but they also believe that there are exceptional situations that require it. “You cannot sell the world that the capital market is something wild. When one takes advantage of the opportunity to cut short at the expense of the suffering of others, the prohibition of bearish positions is justified. As an extreme measure, trading in Stock Market “, says Jose Maria Luna, partner at Luna Sevilla Asesores.
The short ban, even if it were to last, may help to temporarily stabilize the markets, but it is not a panacea in the context of weakening and high volatility of the stock markets. “It is like having a flood and scooping up the water. In addition to not being a type of solution, it goes against the market. Panic should be allowed to clean everything up and then the liquid inverter enters with a calm strategy”, defends Javier Molina, spokesman for eToro in Spain.
Investor mistrust, bordering on panic, has taken on such a dimension that no one sees the shock of inactivity as something that will necessarily happen when the pandemic is brought under control. Hence, experts welcome any measure that can prevent the situation from leading to a systemic crisis.
What is different is that the market is evaluating it that way, as has been evidenced after the announcement of stimuli by central banks and governments. From the reaction of the stock markets in recent days, it can be interpreted that investors miss more certainty than injections of liquidity. Although the latter are essential so that the corporate debt market does not collapse, which would seriously affect the stock markets, Luna emphasizes.
“More money in the economy does nothing, although, of course, it is essential that companies be helped in the short term. The key for the stock markets is the evolution of the coronavirus. They will rise when the data on the infected goes better,” says Molina.
Three basic scenarios are considered in the market.
- If a vaccine is quickly obtained, there will be a V-turn, which would help that production is returning in China.
- If the epidemic can be controlled locally and then more globally, the reaction would be in U.
- If the market plummets and stays down for a long time, the problem will not be the stock market but a background of recession.
Everything remains to be seen and everyone looks at Wall Street, which is named after the markets. Experts were expecting a correction in their indexes, which reached a record high on February 19, just three days before the avalanche of indiscriminate sales began and after eleven years of bull market. But if the movement is getting much stronger than imagined, it is because its catalyst – the coronavirus – has turned into a black swan. “In 2008 there was a demand shock. Now there is a supply and demand shock,” says Molina.
The multiples are more normal but the US Stock Market is not yet cheap for PER (price / earnings per share). The S&P 500 is trading at a PER of more than 16 times, when its historical average is around 14.
No one knows, or pretend to guess, where the market floor is. But a sign that the worst of the crash may have been left behind is that the stock market crash on Thursday occurred with what is known in the technical analysis as a climax. It is when the negotiated figure exceeds the average number of contracts for several months and “leads us to think that there may be a depletion of sales, at least with the news we have now,” explains Jorge Lage, analyst at CM Capital Markets.
Luna believes that the end of this phase of extreme turbulence is not far away, it may be several weeks. “The end of the quarter is approaching and the investment funds are going to try to offer a better picture of how they passed this crash. Many are going to buy between now and the end of March, yes, more defensive positions,” Luna concludes.