Bearish traders should be using the recent strength in the equity markets to identify short opportunities. The S&P 500 is currently trading above 1,100 and has rallied very sharply off of the 1,040-1,050 level in just a matter of days.

This surge in equities appears to be driven by a combination of short covering and better than expected economic numbers. Rather than getting bullish here, however, it may be time to put out some tactical shorts. Traders that have been buying the highs and selling the lows in anticipation of a breakout of the current trading range have been consistently burned.

This post is part of our feature on Money Winners of 2008. See all 20.

Lots of people thought real estate was overpriced. Many worried that banks were giving out mortgages too cheap. But what did you do about it? (Either to help the situation or to make money.) Jeff Greene, a real estate mogul in California, actually found a way to bet against the subprime mortgage folly. He made $450 million -- at least that was the count earlier this year.

Well, he didn't just think of it on his own. He basically took the idea that his friend, hedge fund manager John Paulson, had. Paulson thought that, as an individual, Greene wouldn't be able to do this complex a transaction. According to the Wall Street Journal he even used special software so investors in a hedge fund Paulson created just to exploit the subprime crisis couldn't pass on his strategy.

How Greene and Paulson made money involves two financial terms you've probably had to learn this year and never want to hear again. Collateralized debt obligations (CDOs) are the way mortgages are packaged and sold to investors in various slices of risk. Credit default swaps are the holders of those investments insured themselves -- by buying what was like unregulated insurance from one another. The credit default swaps are what got so many big companies in trouble -- they had to pay up on investments that went bad. So Paulson shorted CDOs and bought some credit default swaps.

Earlier this week I wrote about what a bad idea the SEC's new rule requiring short selling hedge funds to disclose their positions was:

Mandatory disclosure of short positions will expose fund managers to issuer retaliation, frivolous lawsuits and harassment. What's so ridiculous about this rule is that a short position in a stock does not represent ownership of a security, and other than subjecting short sellers to harassment, there is no reason to require that the positions be publicly disclosed.

The SEC failed miserably in its responsibility to protect investors, and now it's compounding that mistake by targeting the wrong enemy.

Happily, the SEC has since seen the light. Short sellers will now be required to disclose their positions to the SEC -- which is fine -- but will not be required to make those disclosures public. If you like PDF files, you can read the announcement here.

What's so hypocritical about this is that while press releases posted prominently on the SEC website were made available for the crackdown on naked short selling and mean trash-talking hedge fund managers, you have to do a bit more digging to find the new announcement that backtracks.

It just goes to show what many of us have been saying all along: the "crackdown" on short sellers was just pathetic grandstanding by an agency that failed miserably in its duty to protect investors from misleading statements by public companies.

SEC Chairman Chris Cox, who has been off battling the imaginary dragon of naked short selling as actual securities fraud continues to be as easy as ever to get away with, has a message for you about the recently-expired naked-short selling rule.

He said that failures to deliver in the 19 financial stocks affected "were reduced substantially" and added that "It was a very effective order from that standpoint." Fair enough. But then he dropped this bomb shell: "We expected and intended to have no impact whatsoever on the direction of prices. That's not the purpose of regulations."

Uh-oh. That takes quite a bit of the wind out of the sails of the naked shore-selling conspiracy theorists -- if naked short selling was an evil scheme driving down share prices, then wouldn't regulation designed to curb it be expected to impact the direction of share prices? That statement from Mr. Cox would seem to be an admission that failures to deliver are a procedural issue, not some conspiracy to drive down stocks involving crooked journalists and a "sith lord" as Overstock (NASDAQ: OSTK) CEO Patrick Byrne infamously suggested.

For a summary of the commentary on this mess, check out this post from Gary Weiss.

One of the most common rebuttals to the naked short selling conspiracy theories is this: Name one company that has been hurt by naked short selling.

In a July 22nd interview with Fox Business, Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne gave an example: Force Protection (NASDAQ: FRPT). "Makes vehicles for soldiers in Iraq. . . stock was at $25, got naked shorted down to $4, canceled the secondary. . . Some soldiers are going to die in Iraq this week because some hedge fund guys need a new Ferrari."

Oops. On August 14th, Force Protection dropped some bad news on its shareholders. In addition to having missed the deadline for filing its 10-K, the NASDAQ is now threatening to de-list Force Protection's stock for failing to file its 10-Q for the quarter ended June 30, 2008. This comes after the company changed auditors and, back in March, disclosed "certain material weaknesses in internal control over financial reporting."

And that is, according to a message Patrick Byrne left on a message board (View the post for a video of the interview) the "easiest way to explain this problem to Congressmen, Senators, and most Americans."

Note to Byrne: I, and I suspect many others, will be more convinced when a company without serious accounting/internal controls problems and/or a failed business model complains about naked short selling. So far we haven't heard anything like that.

When SEC chairman Chris Cox announced an "emergency" rule to make short-selling in certain financial stocks more difficult, the reactions basically fell into two categories: 1.) How stupid: that will create an artificial price increase not justified by fundamentals. 2.) How stupid: if that's a legitimate rule, why not apply it to all companies?

Continuing on the theme of hypocrisy and scapegoating, The Wall Street Journal reports (subscription required) that Cox is set to extend the emergency rule to include "insurance, housing-industry and a broader range of financial stocks."

In other words, let's protect all the stocks that deserve to go down from going down.

I've spent the past few hours trying to figure out who exactly these "emergency" rules are protecting. Why do we need to make a special effort to curb short-selling in companies that are fine, as their defenders insist? Are they protecting the longs? But if these companies are in such great shape and the shares are heinously undervalued because of short-selling, wouldn't that present a great opportunity for investors to go long and profit from the long-term tendency of stocks to move to reflect their intrinsic value? Heck, where are the buyout firms that could be scooping up these undervalued victims of market manipulators?

What's so pathetic about these SEC rules is that they're a giant waste of time, essentially trying to micromanage day to day price swings in companies with futures that are very much up in the air -- time that should be used to improve the poor, and possibly misleading disclosures at many of these firms that led to so much pain for investors.

On Tuesday, the Securities and Exchange Commission threw a brushback pitch at those who are betting on the further collapse of our big financial institutions. Instead of suggesting better oversight of the companies, the SEC is going after short sellers.

For 30 days starting Monday, short-selling will be restricted on 19 financial companies. Financial regulators are also cracking down on "sensational rumors." To put the short-selling rule in perspective, consider that even when the market re-opened after the September 11th attacks, the SEC considered, but didn't implement, short sale restrictions.

Since Bear Steans collapsed and Vanity Fair bought the company's story that short-sellers did them in, everyone is worried that short sellers are bringing the market down. And I'm sure they are, but short-selling, after all, is legal. The SEC just loosened rules on it last year.

Yesterday, SEC chair Steven Cox testified that he's worried about short-selling in connection with spreading false rumors to manipulate the market. OK, that's not legal, but as Cox pointed out, the SEC brought its first case -- EVER -- for this sort of deception this year. And it still hasn't gone after anyone for spreading false positive rumors about a company.

Life as a short seller isn't much fun these days, except for the whole getting rich part.

Rather than slapping them on the back for their prediction of trouble at many of the leading financial firms, regulators and pundits are lashing out at short-sellers, implying that their place on the moral spectrum lies somewhere between child molester and Al Qaeda operative.

And, sadly, the "naked short selling" conspiracy theories that have generally been spread only by the tinfoil hat crowd that Gary Weiss dubbed the baloney brigade are going mainstream.

Forbes writer Liz Moyer writes that "Many hedge fund managers deny naked shorting occurs, but a growing number of company executives, from bigger and bigger companies no less, have complained that short-sellers have used manipulation to drive their shares down."

Well that is kind of interesting. Why are bigger and bigger companies tossing the same allegations that used to be tossed by small, crappy, cash-bleeding corporate crybabies? Because bigger and bigger companies are operating more and more like small, crappy, cash-bleeding corporate crybabies every day! And when the cash is flowing out instead of in, scapegoats must be found.

The Wall Street Journal reports (subscription required) that the SEC has subpoenaed 50 hedge-fund advisers as part of its probe into allegations that traders spread negative rumors to drive down the share prices of stocks they were short.

It seems especially zealous given how little the SEC has done to crack down on a multitude of other problems harming investors, like the inadequate disclosures of serious risks that have sent shares of companies like Lehman Brothers (NYSE: LEH) and Washington Mutual (NYSE: WM) tumbling.

Maybe there was some foul play at hedge funds, and maybe it's a good use of SEC resources to go after it. But it's worth noting that, throughout history, every time a bubble has burst, the short sellers who profited from its demise have been scapegoated for their foresight. The men who were at the helm of Bear Stearns (Yes, it was men. Women would never foul anything up that badly!) when it collapsed can blame rumor-spreading short sellers for causing a run on the bank. It's the same excuse that former Enron CEO Jeff Skilling invoked in his testimony before Congress.

Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne -- sometimes referred to as the clown prince of online retailing -- has never managed to report a profitable year for his company, in spite of years of optimistic projections.

You might think that a CEO would take responsibility for his company's failures after years of over-promising and under-delivering. Heck, he might even lose his job!

But not Byrne, who is also chairman of the board and owns 28.7% of the company. I would speculate that if he did not have such a large stake, he'd have been pushed out years ago. Instead, he uses his place at the helm of a money-losing company to propagate his theory that there is a vast plot against his company, involving naked short selling (brokerages executing sell orders on behalf of short sellers even though they haven't located any actual shares for sale, potentially (theoretically at least) driving the stock down when shareholders aren't selling -- here's more from the SEC on this stuff), crooked journalists, stock bashers, and a sith lord, although he recently conceded the sith lord doesn't exist.

A DealBook piece looks at David Einhorn's very public battles with Allied Capital (NYSE: ALD) and Lehman Bros. (NYSE: LEH), both of which he is short and accused of accounting chicanery. Einhorn's willingness to "talk his book" has generated controversy. Steven Davidoff writes that "Many short plays are enhanced through rumor and innuendo spread by those self-same shorts. Needless to say, these whispers are sometimes unfounded but can do real harm to a company's share price and the company itself."

In his email newsletter, fund manager Whitney Tilson slams this comment: "Hmmm... How many is "many"? More than one? A majority? 99% of the rumor and innuendo in the market I see is on the long side! The shorts I know, on the other hand, perhaps because they're often falsely accused of spreading "rumor and innuendo", bend over backwards to be open and factual."

This is exactly the point. What is the ratio of "pumps" to "bashes"? When Einhorn goes on CNBC and trashes a stock, it's a national story. That's because it's incredibly rare for anyone to go on CNBC and slam a company. The extent of the skepticism we usually hear in the financial media is "overvalued" or "tough prospects."

So I say to Einhorn and Co.: Keep doing what you're doing. Differing opinions, and especially unpopular ones, make for a better market.

David Einhorn has one of the better money management track records of anyone in the business and has also made headlines with his efforts to expose alleged fraud at Allied Capital (NYSE: ALD). If you haven't read his book on that company, it's probably the best investment title of the year.

Einhorn recently sat down for an interview with TheStreet.com (you can watch it below). He's long Target (NYSE: TGT) and Microsoft (NASDAQ: MSFT) but is still short some of the badly beaten down financial stocks and credit rating agencies. He's bearish on stocks that are trading at high multiples in anticipation of a second-half recovery, something he is "not so sure about."

With the former CEO of naked short selling conspiracy theory poster child Richard Altomare locked up, the group Gary Weiss calls the baloney brigade is badly in need of a new commander in crap.

Well it looks like they can forget about Biovail Corporation (NASDAQ: BVF). Fortune's Roddy Boyd reports that, a couple months after the company settled an SEC complaint for $10 million, "The big Canadian drug company agreed Friday to plead guilty to U.S. kickback and conspiracy charges ... Biovail and a New Jersey-based subsidiary will pay a $24.6 million fine to avoid a court case that could have cost them future business with federal agencies."

Gradient Analytics -- which had published negative research about Biovail and head cry baby Overstock.com, Inc. (NASDAQ: OSTK) and was subsequently sued by both companies -- appears to have been right on the money in its criticisms of Biovail.

Moral of story: when a company starts suing people and lashing out at its critics, sell the stock. That philosophy would have saved people a ton of money on Biovail.

Of the 50+ business-related books I read each year, maybe 15 were worth reading, in retrospect. Then another five of those are memorable -- in a good year. Hedge fund manager David Einhorn's book Fooling Some of the People All of the Time leapfrogs both of those categories, and establishes itself as a classic of business writing.

The story behind the book is intriguing. It's actually amazing that it ever got published, and tremendous credit should be given to Wiley for taking a chance with such an unconventional tale. Here's the deal: In a 2002 speech at a charity event, Greenlight Capital hedge fund manager David Einhorn gave a speech at a charity event. Asked to talk about his favorite investment idea, he spent 15 minutes explaining why he believe that Allied Capital (NASDAQ: ALD) was a financial crime in progress, ripping off investors and taxpayers as a Small Business Administration lender. Einhorn presented compelling evidence of aggressive accounting and indeed fraud, and disclosed that he was short the stock.

The speech made headlines and the stock tanked. Over the past six years, Einhorn has continued to beat the drum against Allied Capital, presenting information to regulators, reporters, and investors.

I know the title of this post seems cheeky, but I'm actually serious: if you lost money on Crocs (NASDAQ: CROX), you should thank the aggressive short sellers who may have helped you avoid losing a lot more money.

Nearly two years, Mad Money host Jim Cramer called the short sellers in Crocs "way too aggressive." While those shorts got burned in the short-run, the longer-term decline in the company's fundamentals has proven they were right. Renowned short seller Manuel Asensio was a vocal critic of the company, raising questions about its valuation and prospects back when it was the hottest company on Wall Street.

With a short interest of over 38% when it was a high-flier, it seems likely that short selling kept a lid on the company's run-up.

And who did that hurt? The insiders who were dumping shares like they were going out of style the way that Crocs subsequently have! The aggressive short selling capped the transfer of wealth from small investors to insider in the low hundred millions. Had the stock been allowed to soar over $100, the damage might have been much worse.

So if you lost a few thousand on Crocs, go hug a short seller! They saved you from yourself.