"Click on the chart to zoom in."Everybody wants to know, why did the U.S. stock market drop near 9% today?
What a day! Stock market dropped near 9% intraday in matter of minutes. Dow Jones fell 998.50 points in just a couple minutes. Bloomberg and CNBC tried to calm investors they said it was a computer error! Yeah right!!!
There was no computer error. If you had access to a good dealer/broker you could buy/sell. Please note that market was down over 3% before everything start to fall apart. Plus before the U.S. market free fall the Forex market started to fall which ignites the stock market sell off. I noticed the the unwinding of the carry trade*1 of Japanese Yen. To me that was the main catalyst for sell off in the U.S. stock market. Therefore I'm not going to buy the nonsense that NASDAQ came up with about computer error. Please note they are going to cancel any transaction between 2:40 P.M. and 3 P.M. that +60% away from the market value.
What we have witnessed today was computerized selling. It is not wise to single out one event for the market free fall today, as a financial analyst I think there was series of events that caused the market crash. I think there are three possibilities:
1) A trading desk in a big financial institution made a mistake and entered a wrong number, which flooded the market with sell orders and caused institutional stop loss got hit one after the others that ignites more Stop-Market orders hit the exchanges and cause the market fell in just a couple minutes, but if anyone worked in an institutional trading desk knows that you cannot trade in such a huge number before you get approval from your supervisor, therefore this scenario does not have a good chance.
There was no computer error. If you had access to a good dealer/broker you could buy/sell. Please note that market was down over 3% before everything start to fall apart. Plus before the U.S. market free fall the Forex market started to fall which ignites the stock market sell off. I noticed the the unwinding of the carry trade*1 of Japanese Yen. To me that was the main catalyst for sell off in the U.S. stock market. Therefore I'm not going to buy the nonsense that NASDAQ came up with about computer error. Please note they are going to cancel any transaction between 2:40 P.M. and 3 P.M. that +60% away from the market value.
What we have witnessed today was computerized selling. It is not wise to single out one event for the market free fall today, as a financial analyst I think there was series of events that caused the market crash. I think there are three possibilities:
1) A trading desk in a big financial institution made a mistake and entered a wrong number, which flooded the market with sell orders and caused institutional stop loss got hit one after the others that ignites more Stop-Market orders hit the exchanges and cause the market fell in just a couple minutes, but if anyone worked in an institutional trading desk knows that you cannot trade in such a huge number before you get approval from your supervisor, therefore this scenario does not have a good chance.
2) A couple quant funds who use algorithmic models to trade; Started to liquidate on very high volume they probably wanted to dump their stocks and currency holdings to buy future market. Because right before the big dip I noticed near 3 standard deviations move from the mean, between future market (E-mini) and stock market it means future market became extremely cheap compare to stock market. They wanted to take advantage of this opportunity, therefore they start to dumping some of their holdings; market was flooded with sell order which caused the institutional Stop-Loss triggered one after the others and caused a cascading effect then High-Frequency trading firms canceled their bid orders, which helped to dry out liquidity. I think when High Frequency trading firms stopped trading caused the free fall at 2:40 P.M. At the same time NYSE decide to delay the transactions to slow down the selling which cause transaction transferred to NASDAQ and other exchanges in the absent of NYSE market suddenly face the lack of liquidity therefore the was not enough money to catch up with flood of stop-market orders, there were not enough bid orders (buy orders), therefore computers dropped the sell price to match the bid orders that explained why some companies trade as low as a couple penny.
Accenture plc (CAN):
Day's Range:$0.04 to 42.30
3) There is an other possibility; a big financial institution dupped a big number of E-Mini S&P or went short the E-Mini S&P on heavy volume or they bought huge number of Put Option on stocks. When other institutions see such activities they start to panic and dumped their holding at the same time market makers who helped the financial institutions to issue their bearish bet start to sell some of their holdings to hedge which flood the market with sell orders, and the rest would be the same as I explained in #2). I think this is what most likely caused the free fall.
We had the biggest volume trading since Dec 2009 there was 2.6 Billion shares were traded. Today roller coaster moves will scare many retail investors and caused them to become more cautious in their trades or stay away from stock market for a while. Many investors are going to get the margin call, they have two options, they could take a tremendous risk and pray to god that market some how shoots up; or they have to inject money into their accounts if they fail to do so their brokers is going to sell their securities after 3 days to cover the margin. If market tanks Friday and Monday investors will scare away and start to dump their holding and S&P500 is going to take out 1065.79 . If it would not hold next possible support level will be February low 1044.40 . It would be interesting to see what is going to play out with in next 3 trading days.
*1)Cary Trade:Investor sells a certain currency with a lower interest rate and uses the funds to purchase a different currency that yielding a higher interest rate. Traders using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used. This is a very risky strategy because you get hurt if the interest rate or currency value changes.
We had the biggest volume trading since Dec 2009 there was 2.6 Billion shares were traded. Today roller coaster moves will scare many retail investors and caused them to become more cautious in their trades or stay away from stock market for a while. Many investors are going to get the margin call, they have two options, they could take a tremendous risk and pray to god that market some how shoots up; or they have to inject money into their accounts if they fail to do so their brokers is going to sell their securities after 3 days to cover the margin. If market tanks Friday and Monday investors will scare away and start to dump their holding and S&P500 is going to take out 1065.79 . If it would not hold next possible support level will be February low 1044.40 . It would be interesting to see what is going to play out with in next 3 trading days.
*1)Cary Trade:Investor sells a certain currency with a lower interest rate and uses the funds to purchase a different currency that yielding a higher interest rate. Traders using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used. This is a very risky strategy because you get hurt if the interest rate or currency value changes.
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