Thursday, May 06, 2010

Well, that was interesting...

One of the problems with the stock market for the past 7 months is that it has basically been treading water on very thin volume. The markets are up 0-8% over this span and every up day looks exactly the same. High volume trading in garbage names like Citigroup, AIG, Fannie, Freddie, etc, and that was able to prop things up while generating massive profits for the traders.

However, what happens when everybody hits the exit door at the same time? Well, you get a day like today.

Basically, we relived the crash of 1987 in about 10 minutes today. There is plenty of blame going around including the ubiquitous "fat finger" rumor (the tale of the fat finger implies that a trader meant to buy or sell 100 shares but instead leaves his finger on the button and buys or sells 1,000,000 shares). I don't buy that story. I prefer to think that this was the first of many "terminator-style" war among the machines that may hit the market in coming years. I noted early in the day that 1150 was a key number for the S&p500 to the technicians. Once that number was violated the computers started piling on which triggered many stop-loss orders until 1130 was crossed and then the computers went nuts and took the Dow down 600 pts in 5 minutes.

This is the problem with the automation of today's markets. It exposes investors to wild swings that are completely unrelated to fundamentals. No one seems to mind these issues when they are driving stocks up but on the downside, yikes!

Asian markets are continuing the slide right now but it's a much more controlled 4% dip at this moment.

As I've said, a number of big market players moved to cash this week and they are looking for entry points to load up their short positions. This could get interesting, but tomorrow's job report could change the tone very quickly (expect a fairly strong headline number - we'll have to back out Census jobs, birth/death adjustments, etc, etc, before we get an accurate number).


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