It’s a Dangerous Market Indeed

There I was, sitting and watching the computer screens. At around 2 p.m. on Thursday, the DOW was down about 140 points and the NASDAQ lowered by nearly two percent. I was concerned that the failure of the major stock indices to hold at the key pivot points and support levels was driving more selling. I also commented that, given the European situation, the DOW could fall back to just above 10,000 for a 10% correction. “Until we see some buying support, be very careful, as the current market environment is dangerous,” was my comment on my daily trading service.

This was at 2:01 p.m. About 40 minutes after this, I could not believe what I was watching on the screens. Was the DOW down nearly 1,000 points to below 10,000? The NASDAQ was down 200 points. “What was happening?” was my thinking, as I double-checked other data sources to see if perhaps erroneous data on the market was inadvertently posted. There was no error; the DOW was below 10,000. But then stocks began to rise quickly in the last hour of trading, with the DOW picking up just over 600 points! What a crazy day. Something I have not witnessed since Black Monday in 1987.

So, what happened? Apparently the swift and mass selling was triggered by a trading execution error at a major brokerage. The aftermath was a 1,000-point sell-off in the DOW in a 20-minute window that saw many major stocks fall by large amounts that were due more to error. Once the selling started, I think computer-based stop-loss trading and high-frequency trading drove a domino effect for selling.

Given the declines, the markets corrected over 10% this year before the intraday rebound. The correction was important, as it is normal and healthy in a major uptrend. The major selling also indicates the prevailing nervousness in the markets and how vulnerable investors are.

The various stock exchanges will work at dealing with the trades that occurred on Thursday due to the error. Yet, according to the NASDAQ and NYSE, only those trades that had price deviations of greater than 60% between 2:40 p.m. and 3 p.m. from the 2:40-p.m. level would be cancelled. This means that if a stock fell by 59% due to the error, you are out of luck. Doesn’t seem like a good resolution, but, given the complexity, there was probably little choice and there’s no appeal process. For those who purchased at cheaper prices less than the 60% rule, the stocks have bounced back and you have made some quick profits, but you have got to feel bad for the losers.

Make no mistake about it, this is a dangerous market, so be careful. What we saw last Thursday was troublesome, as there appeared to be a lack of safeguards to prevent an error from wiping out the stock markets in an instance. The whole computer trading system must be examined. There must be safeguards built in to prevent what we saw. I’m sure the politicians on Capitol Hill will soon demand an enquiry into the market fiasco to see what caused the erratic market move.