By Decision Point:
The market crashed spectacularly today. At one point the Dow was off nearly 1,000 points and the S$P 500 off nearly 100 points. At this writing they are still trying to figure out what caused it. A trader’s entry error at a major firm is suspected, but nobody has owned up. I have an opinion/theory that seems to be borne out by the 10-minute bar charts, but, of course, I can’t prove it.
Looking at the intraday market action, we can see that prices were sliding into a ditch most of the day prior to the crash. It is my best guess that stops were triggered and began to accelerate sell orders as prices dropped. Welcome to the world of electronic trading.
The question I haven’t heard anyone ask is what caused the sudden rebound? My guess is that the Crash Prevention Team (Treasury/Fed) stepped in and began buying S&P futures hand over fist. Can’t be proved, but it seems as reasonable as any urban legend.
From a technical point of view, I was greatly surprised by today’s crash. Yes, we have plenty of evidence that a correction was due and in progress, but there is no preponderance of evidence that substantial internal weakness exists — the kind of weakness that typically precedes major declines.
Fundamentally, of course, the global financial system is a disaster. But so it has been for several years.
Bottom Line: The market is extremely oversold short-term, and we should get a bounce out of these conditions. After a bounce, we can look for a retest. If instead we see more days of sloppy sideways-to-down action, or more followthrough on today’s decline, the outcome could be catastrophic. For now I think we have seen the worst for this correction, although it will probably take several weeks to work things through.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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