May 06, 2010

A Trading Glitch - Really?

Interesting trading day in US markets.  At the worst moment, the Dow Jones Industrial Index was down nearly 1000 points and plenty of stories were floating around as to why the massive sell off occurred. Reuters reported that Stocks plunge as trading glitch suspected:

The Dow suffered its biggest ever intraday point drop, which may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said.

To get an idea of how close we were to even more hysteria, please consider the current NYSE rules on Trading Halts Due to Extraordinary Market Volatility.


Whether this was a glitch or simply a nervous sell-off, one thing seems certain: the market is telling us “Complacency no more.”  And it was exactly that complacency which caused us to be concerned when we wrote about the make-up of the recent economic data in FXIS Market Insights 24 April 2010:

We also believe that the stock market may have run a fair bit ahead of itself.  The Price/Earnings ratio of the S&P 500 currently has a multiple of 22.04, on a cyclically adjusted basis.  That value is about one third above its long-term historic average of 16.36.  Further, through a combination of near zero interest rates and a general sense of “the worst is over”, risk appetite has returned to the markets.  The volatility index, a.k.a. the fear index, has been back at pre-crisis levels for a few weeks now.  Too much complacency?

Take a look at the VIX index’s massive rise today to get an idea of how fast fear came back to the market. 


In view of tomorrow’s US employment report, I recommend an early dinner and plenty of good sleep.  Tomorrow should be an interesting market day.  Good luck and good trading!

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