Wednesday, May 12, 2010

The Twenty Minutes of Hell

I hate to see people get hurt on highly volatile days as was the case last Thursday with the wild swings of the stock market. However, I am sure that a lot of people did get seriously damaged financially. I am already hearing stories of people who sold out as a result of being emotionally involved in what was happening last Thursday. There have been stories in the Wall Street Journal about how several people got hurt, some losing over $100,000.

If you put in a market order at the wrong time during that infamous “twenty minutes of hell” stretch, then you could have received back only 1 cent per share on your investment. Market orders go in at the then current price. If you failed to notice the current quote, then you would have been affected severely. People who are emotionally involved and in a hurry often fail to look at the quote when they are selling.
 
I saw several investments with quotes of only one cent a share on positions that should have traded in a more narrow range. It was one of the craziest things that I have ever witnessed in regard to the stock market and its volatility.
 
The SEC has come out publicly and said that they could not find the cause of the sudden precipitous drop in the stock market that day. If they do not know after conferring with the major stock exchanges, then perhaps we have a wee bit of a problem here. How can anyone trust the markets if they know the possibility of a repeat scenario can happen?

The SEC just announced today some specific measures to address this critical issue. They revolve around circuit breakers and busting trades. The circuit breakers have no possibility of working when the majority of trades are traded off of the exchanges via computer trading programs.

I do not know anything more than the SEC does, however, I knew that something was probably wrong with some computer trades and the last thing you want to do is try and sell under these kinds of conditions. Further, when the SEC announced that they would bust trades, then that means that those who bought would not get their expected profits and those who sold would not experience their significant losses. It also means that the losses in the market would be put back during that time period. In other words, if the market dropped 1000 points and they were going to put back 60% of that, then this means that 60% of the loss would have to be “bought back.” What I mean is that 600 points in the DJIA would have sell orders eliminated and this would in effect act like 600 points worth of buy orders by the SEC ordering the busting of the trades. Therefore, I knew the market would go back up rather quickly as a result. So far this week, it has recouped over 500 points on the DJIA, just as I suspected.

Doesn’t this make sense? It does make sense when well thought out thought processes factor into decision making as opposed to emotional ones. Granted, I know everyone does not possess the same instincts or intellect, but if you make a promise to yourself not to sell when you are emotional, then you will be better off in most cases.

Believe me when I say it, I have gone to cash before for our clients, but I didn’t do it in a panic. You cannot make decisions to go to 100% cash in a panic like last Thursday. All you will do is regret it.

You cannot let your emotions get the best of you in a situation like this even when we have never before seen a situation like this one.

Lesson learned I hope.