What is a Phase 4 chain reaction? Doesn't that happen when one of those "bypass flux capacitors" fails on StarTrek? Arch
I think that during the crash you had a situation in which sellers became very aggressive as opposed to buyers. That is, they where willing to sell for less and less, but buyers still had now willingness to step in and buy. This type of action of course leads to lower price. This type of scenario is what causes all crashes and even thought it might sound like I'm being a smart ass, I'm not and it's important to keep this simple truth in mind: Markets go up whenever buyers are, for whatever reason, more aggressive than sellers, and market go down when sellers are, for whatever reason, more aggressive than buyers. Simple as that.
I have to agree with you 100%. However, you give no insight into the true trigger that led "sellers to become very aggressive as opposed to buyers". It's like saying that the secret to making money in the stock market is to hold stocks while they're going up and let somebody else hold them while they're going down. That may be 100% true but difficult to put into practice. Arch
The market had been coming off hard for weeks. Bond futures had broken 10pts earlier in the year with no effect on stocks but as Bonds started their last leg down in August stocks topped. You had a lethal combination of frothy p/e's with rising rates. That said, it was portfolio insurance (i.e. stops and put purchases) that overwhelmed buyers. Many traders in the OEX pit at the CBOE (at that time OEX was virtually the only index options market) had been punked on Friday's October opex when the Dow closed down -150. Instead of getting out of Dodge, MM's merely rolled their short Oct puts into short Dec which appeared abnormally pumped due to the magnitude of Friday's break. The only problem was that the sellers of futures and buyers of puts just kept coming. It was the equivalent of a giant cascading stop on Globex. While IMO a -22% is the equivalent of DiMaggio's 56 game hitting streak, I'm VERY cognizant that if ES takes out some crucial support underneath you could see cascading stops of such magnitude that futures move 50pts on a single blip.
Same reason all markets correct - they don't always go up. It is actually healthy for the market to wring out the excess froth. The loftier it gets the more severe the correction will be. Needless to say, new highs will eventually be reached. But if >95% of traders understood this basic premise - there would be no advantage for the rest. In the meantime, a whole slew of money grubbers have entered the arena these last few years - with WAY off-based ideas - and will now (mostly) be permanently removed from the trading community. And once again a whole new crew will replace them... Paysense.
Personally I've always thought it was a combination of Baker's comments and some sort of program selling glitch that took out all those stops. Who knows. But whoever mentioned the fact that current ARMS are set for October made an excellent point. When Wells Fargo made a unilateral move in the pre-market on Friday to hike the rates on the jumbos, I have to say the "R" word was the first to pop into my head. Higher rates = fewer eligible borrowers = higher inventory of unsold homes = price reduction of homes = loss of asset value and net worth = an even more serious problem than we have now. The next thing I knew, Cramer was having a nervous breakdown on T.V.
Microsoft dropped 30% on Black Monday, Oct 19, 1987. It was a year after it went public. It took 2 years to recover. The investors who sold missed the greatest growth period in the company's history. http://finance.yahoo.com/q/hp?s=MSFT&a=02&b=13&c=1986&d=09&e=20&f=1987&g=d
Exactly. Baker's words created a tizzy for an already extremely weak dollar and nervous foreign exchange market. As noted, rates had been rising all Summer to some fairly high levels in the 30 year. Made for a great play come the "flight to quality" trade. Portfolio Insurance had given major funds a false sense of security. But when Kidder Peabody sold 33,000 S&P futures on Monday morning as part of the "dynamic" hedging that modern Portfolio Insurance prescribed to, there were no solid bids, and the market traded to extreme discounts, at one point the S&P was 45 handles under cash.
I know a guy whos subscribers made millions on the day, his advisor economic model picked it 2 weeks before the event. The average subscriber made 130 times there monies, many became millionares off $10k. It was a combination of corporate credit costs, valulations, and no corrections...oops just like today..
in Frost and Prechter's 'Elliott Wave Principle : Key to Market Behavior' they state p 164 " . . . for the orthodox high of the market [DJIA] close to 2860 . . . " with a turning point to occur in 1987, the actual high was 2746 not a bad call considering the quote was published in 1981 perhaps the 'what' was because 'everyone' had read the book