The SEC warns short sellers, and stocks rally. Good timing?

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The Securities and Exchange Commission would never say it wanted the stock market to rally today.

But given the agency’s ramped-up offensive against what it believes to be market manipulation by bearish traders, the session’s spectacular rebound had to be more gratifying to the SEC than, say, another dive.

Wall Street had its biggest one-day gain since April 1, with the Dow Jones industrial average rocketing 276.74 points, or 2.5%, to 11,239.28.

Financial issues, which have been brutalized for the last six weeks, led the way higher. The Standard & Poor’s 500 financial-stock sector soared 12.3%, the biggest advance in its 19-year history.

To put today’s jump in the financials in perspective, though, the S&P’s sector index still is down 33.5% year to date. And it’s just back to where it was five days ago.

Wall Street had virtually the perfect setting for an explosive rally: The gloom had been extreme Tuesday, as financial-system fears sent the Dow to a two-year low and trading volume reached the second-highest-level ever on the New York Stock Exchange. A key measure of investor fear reached its highest since mid-March.

It was ‘a crescendo on the downside,’ said John O’Donoghue, head of equities at Cowen & Co. in New York. ‘The selling became exhausted.’

Then, as the market opened today, it had the tailwinds of a better-than-expected second-quarter profit report from banking titan Wells Fargo and another steep drop in the price of oil.

All in all, it was a good moment for short sellers -- traders who’ve been betting on falling stock prices, and who’ve been right for the last six weeks -- to take some profits by buying shares to close out at least some of their bets.

‘I would guess most of this was short-covering,’ said Todd Clark, head of trading at Nollenberger Capital Partners in San Francisco.

For the SEC, this looks like a happy coincidence: On Sunday the agency warned that it would come after people who it says are spreading ‘false information intended to manipulate securities prices.’ That’s code for short sellers.

On Tuesday, SEC Chairman Christopher Cox announced a temporary plan to curb what he called illegal short selling in 19 major financial stocks, including mortgage giants Fannie Mae and Freddie Mac. Today, just adding to the confusion over the SEC’s move, Cox told reporters that the measure was ‘prophylactic,’ not based on an actual jump in abusive shorting of the 19 stocks.

Did the SEC scare some short sellers out of their bets today? Maybe some of them. But as noted above, the market was primed for a rebound anyway. The SEC may just have been very lucky with its timing.

It’s worth remembering that professional short sellers generally aren’t pushovers. If they believe the market is going lower, they’ll be back. As Clark notes, there have been plenty of short-term rallies since this bear market began last fall, but ‘you haven’t been rewarded for chasing any of them.’

And as the SEC fully concedes -- and hopefully truly believes -- as long as short sellers are playing by the rules, the government has no business getting in their way.