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Wall Street crashes - What actually happened last night? Listen...
Darshan's Daily Market Ponderings
Wall Street crashes - What actually happened last night? Listen...
Friday 7th May 2010
Last night, at it's worst point, $1.1 trillion was wiped off the S&P and the Dow alone. We had the singlet biggest one day crash in the history of the US markets. The media blamed it on erroneous trades on Proctor & Gamble stock. I'll explain why this is pure bull in a minute.
First please listen to this! Courtesy of the guys at Zero Hedge, a recording of the action in the pits during the crash last night. The most chaos you will ever hear. Wait for about a minute in and listen to the panic as the offers disappear. This is amazing stuff and any trader, will remember this for a long time coming. Even if you don't follow the markets, the fear is tangible in the trader's voice.
Now read on...
Many innocent retail traders and investors, lost a lot of money yesterday. At one point, the FTSE futures dropped 17%! Yes you read that right. Last night was like the winter of 2008 - when we saw 500 point moves as standard, swinging both ways. I remember one day, where the Dow dropped over 600 points, only to swing back and close up on the day! However, last night was just something else. I have never seen anything as vicious at that time of the trading day. The bulletin board I run, had many casualties, as margin calls were called in and stops were tripped. One retail trader, lost #49,000 in a half hour period...only to see the market rebound and erase all loses by this morning - unfortunately for him, he'd already lost the money. What was the cause of this?
Do you want the media explanation or the truth?
Well the media bs was that it was a fat finger trade - a trader at Citi, apparently hit the billion key instead of the million key. An erroneous trade on Proctor & Gamble stock then saw it's value decimated but then recover. At one point, Accenture's market cap was almost wiped out as it dived into the single digits! Once P&G collapsed, this set off stops all the way down and this caused a cascading sell off. This last bit makes sense. However, the first bit does not.
So what they are trying to tell us, is that $16bn moved the market a 1000 Dow points during heavy trading? Seriously, who are they trying to kid!?
What actually happened?
The truth is clear, to any one who trades for a living. The clue - is the forex markets. They were melting down BEFORE the market began crashing. Look at the EUR/JPY pair in particular. Here is the picture for you, overlayed next to an SPX chart.
See the picture?
It was the computers vs the locals in the pits!
Somebody was liquidating positions way before the panic set in and the sell off in the EUR/JPY pair before the sell off in the SPX is clear. In fact, once the ES broke 1100, all bets were off. Nobody was buying. At all! All bids were pulled. What would normally happen now, is that the NYSE would just halt trading for a minute or so, until they can find some bids. However, the computers kicked in and the electronic exchanges assume that 'no bids' means, that they should just execute trades at the nearest available ask price.
So the computers kicking in, meant stops got wiped and bids collapsed even more. This is why algo trading should be regulated better. It creates absolute chaos in the market. A $16bn erroneous short, should not have kicked off such carnage - it did though - all because somebody wanted it to and computers (not humans) traded it all the way down.
In effect, what happened was that the market makers managed to wipe out all the stops down to hard levels yesterday. Why? Well, this makes it easier for the market to crash properly, when they start offloading the securities they have been buying over the last year. Remember, the big guys will switch to short and cream the retail traders all the way down to the lows again. They don't want nested orders getting in the way. They needed a clear path.
Sadly, from the lows - the SPX jumped 40 handles in minutes! So anyone that got wiped out on the way down, saw the market literally come back at them and laugh in their face.
We live in interesting times but remember, you had been warned about sell offs like this occurring. I expect more of this chaos over the next year. As I have said - see you at new lows beyond March 2008. Anyone long is crazy full stop. I can see them trying to create some sort of a high, to offload more stock. However, for today, I would encourage you to stand back and wait to see what the NYSE does when the market opens. I expect some major volatility, as we find out which funds got wiped out because of this and margin calls.
In other news - the UK elections are over. The scores are in - the UK has a hung parliament. Should makes things interesting for sure. Unlike those that are scared by it - I am not. Some balance, can only be a good thing. More importantly, why the UK went crazy over the elections - two major things were happening on the global markets. For one thing, Cable was dropping hard - as I warned you about! Interestingly, the BBC's Business Editor, Tim Weber - blamed this on the hung parliament. Good one Tim - why not put some effort into your work? This is the same editor, that I got into an argument with last month, when I said that the Pound was in trouble - due to the technicals. I was told that the BBC reports fact, while I just predict. Well, guess - I'd rather be right, than report nonsense.
Just stay safe today ok. Switch off the news - do not listen to the 'facts' - just stay safe. Goodness the banking system needs regulation and I just don't see it coming. Only last night, as all this happens - the calls to break up the six largest Wall Street banks - was rejected by the Senate. Madness.
If you have any questions - please don't hesitate to ask.
Good luck and if last night's chaos has lost you money - remember what's important in life - your friends and family. Money can be made back.
Darshan
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Edited: May 8th, 2010
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