Was Today's Market Crash a Computer Error?

crash stock errorFor many, today was starting to look like the beginning of Armageddon on Wall Street, as around 2pm Eastern Time, markets completely began to crash. At the height of the drop, the Dow had dropped over 8% (over 990 points!). When I saw the numbers come across my computer screen, I had to blink twice. I then went to check two other sites as well as my phone to see if what I was seeing wasn't a glitch. Indeed, it was really happening, however, markets were somehow able to aggressively rebound back and close down just under 350 points. Sure, the final closing is still the largest we've seen in a year, however, it looks much better than a 1000 point down day, which would have been the largest one day decrease in the history of the Dow.

So what happened? Well, that explanation seems to be under debate as we speak. Many sources are claiming the mass selling was triggered by a computer error. Some sources are saying that a trader entered a "b" for billion instead of "m" for million in a trade possibly involving Proctor & Gamble (see trading chart below), a company within the Dow. There is speculation that Citigroup may be the bank that issued the erroneous trade, however, they are claiming that their data matches up and that the trade came from somewhere else. At any rate, the first thing you need to decide is do you really believe this solely caused today's crash?

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Sure, with the evidence of a large increase in selling volume in PG (which is usually a very moderate moving stock), questions should arise. However, can we really believe that someone has access to completely derail the entire US Stock market with the typing of a letter? Really? If this is true, I believe terrorists just found a new weapon for the US. I have a hard time believing that the entire stock market was selling off due to a solo computer glitch. However, this explanation sure does a good job of explaining one of the wildest days of trading and helps to restore some security back in markets. Here's my theory...

Due to over double the volume being traded on the Dow, I believe there is a bit more to the story than just the P & G episode. I do believe that some selling had been initiated by the large drop in PG's price, however, I believe other sellers took over as well. The problem with today's way of trading is that everything has become automated. Sure, it has made stock trading ever so convenient, however, on days like today, it can be a disaster. Hedge funds and institutions around the world are holding positions in the stock market and many times stop losses are placed on them to minimize losses. Well, due to our current, very fragile market at the moment, many of these stop losses have become rather strict and can trigger with just a few percentage loss. With the plunge in the Dow, I am sure many of these automated selling positions were triggered, which in turn ignited the domino effect that we saw today. Do I believe that the government intervened with some help to put an end to the crash, sure, but that's me.

I cannot say today's event was a natural event, however, the gains and losses that were experienced today were as real as they get. In fact, my portfolio had a huge day for the good. The ETN I discussed yesterday, VXX, was at one point, up over 25%. My shorts on SPY and longs on SDS also killed it. My positions in gold were also rewarded. I was able to take a lot of profits in these today, as I felt from the beginning of today's crash, the market was not naturally behaving. I do not want to risk what could be a very big buying day tomorrow, if people all of a sudden feel the need to buy back into their old positions at a discount.

So this complicates tomorrow's trading a bit, which is why I greatly lowered a lot of my short positions today. Tonight, many will most likely be reading the story of the "computer glitch" trading and feel that today was a fluke. Is there really turmoil in Europe that could be a big problem for the US? Sure there is, but the glitch story will definitely take precedence. After reading the story, many may feel that now the market is undervalued (if you could believe that) and feel the need to buy back in fast to take advantage of the glitch. This could spark a rather large buying day tomorrow. On top of that, we have the unemployment news wild card, which if turns out to be positive, could be another log to throw on the rally fire. At any rate, I did not feel like giving back most, if not all, of today's profits.

My personal belief is that markets will open up very strong out of the gates tomorrow. PPT has seemed to be a bit more active on Friday mornings. This combined with some anxious buying, we could be in store for a very strong morning. If that does indeed happen, I plan to take some short positions, as I do believe we will begin to trail off by the end of the day. Investors are becoming more and more cautious about holding stocks over the weekend. However, I dare not hold my short positions over the weekend (I'll cash out before close) as the last 10 Mondays have been in the green. I will be using pretty strict stop losses, so lets see what happens. Happy Trading.
PS - Trading is looking to become a lot more interesting here in the short term. For those that utilize social networks... Add us to your list - Twitter & Facebook

5 comments:

  1. dreadwinaard Says:

    FF, haven't been by in a long time, but I hope you feel vindicated after this long, relentless move upwards in the markets.

  2. Václav Says:

    hi,
    I undertstand that you can not believe that one letter can make 1 trilion USD lose in 5mins for stock market. Although me too, there are a lot of things for thinking. PG is in DOW -> and most traders using ETFs and others tools for trade more stocks in one trade -> so, P&G can kill DoW by - i do not know - maybe 1-2%, and after that will selloff all stock what are in ETFs/indexs where is PG -> and after that, all in DOW etc.-> domino effect.

    It was oviously:
    - 3 downs in row
    - graphs looks like _falling knife patternt
    - and supports was burned

    in this case SELL-OFF is normal beahvior for computers algorithms and orders for SELL (stop-loss), although we call it "HELL" in humand world ;)

  3. Anonymous Says:

    There were definitely a lot of naked shorts, glitches, and prop "flaws" (or perks) that took place on the 6th. I like small caps http://www.microcapreports.com/ to do well in the next month as they rebound.

  4. QUALITY STOCKS UNDER 5 DOLLARS Says:

    The flashcrash was something never seem before.

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