1) The Real Cause of the 'Flash Crash.'
When I boarded my plane in San Francisco on Thursday morning, May 6, the Dow was down an uncomfortable, but tolerable 150 points. When I arrived in New York that night I was greeted with headlines screaming 'CRASH: DOW PLUNGES 1,000.' I was not surprised. In a letter sent to my premium subscribers the day before I predicted a fall in the S&P 500 to 1,050 (click here for the call), although I thought it might take two months to get there. Instead, we got it in two hours!
Since then, I have heard every possible explanation for the instant death spiral. A fat fingered trader accidentally entered an order to sell not one million shares at market, but one billion. Al Qaida hacked into the NYSE mainframe. High frequency traders ganged up on a thin market to generate some windfall profits. I heard every possible theory, except the one that was the true cause-- stocks are too expensive! The US economy is in the midst of an epochal transition from a long term GDP growth rate of the 3.9% rate we saw during the last decade, to maybe 2%-2.5% this decade. If you don't believe me, look at the chart below showing a rapid deterioration of the leading economic indicators for most of the OECD. The 'V' is rapidly turning into a 'square root.' That does not support the PE multiple of 23 the market was sporting a few weeks ago. Maybe the lower growth rate supports a 16 multiple, but only on the best of days when buyers are feeling wonderful about themselves. When the fall came, all risk assets moved south in unison, while Treasuries exploded through the roof on a flight to safety bid, along with the dollar. This was also as I expected (click here for that call). Let me spell this out more clearly. When I say there is a massive risk reversal at hand, what I really mean is 'Run, Forest, run!' (Forest Gump for international readers). It is not the time to be too clever by half by staying short the yen (YCS) or the 30 year Treasury bond through the (TBT) (click here for my pleading with you to heed the wake up call to tighten up your risk controls). Those of you who took my advice to pile on the cheap downside protection while volatility languished at 16% (click here for that call), made an absolute killing as it raced to 42%. Suffice to say that as the euro breaks $1.25, the dust is still flying in great impenetrable clouds, and the sidelines seem more comforting by the minute. Remember, there is no law that says that you must always keep a position on, no matter how hard your broker argues to the contrary.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00madhedgefundtrader@yahoo.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngmadhedgefundtrader@yahoo.com2010-05-17 02:00:432010-05-17 02:00:43May 17, 2010 - The Real Cause of the 'Flash Crash'
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
Essential Website Cookies
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
Because these cookies are strictly necessary to deliver the website, refuseing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.
We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
Google Analytics Cookies
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.