What The Heck Happened Yesterday?
The Dynamic Wealth Report
May 7, 2010
History was made yesterday… and not in a good way. All eyes were
on Greece. The riots were front and center… the markets were drifting
lower… then the firestorm hit.
Within 20 minutes, the markets had plummeted more than 700 points. The
entire office was just glaring wide-eyed at the TV. The markets were in
a word… “shocking”. Being down almost 1,000 points isn’t an everyday
occurrence.
Was it a bad trade?
Was it market manipulation?
Was it hackers?
Was it “Wall Street” screwing the little guy again?
Or were these real trades…
It will be awhile before we understand exactly what happened. As I write
this, they’re calling the steep drop a “glitch”. Others are calling it a
clerical error. I don’t think anyone knows. All I know is the markets
plummeted.
And this is a perfect opportunity to learn a great lesson.
This was a perfect example of the madness of crowds.
How crazy was it?
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Nobody describes it better than the Wall Street Journal, “The $9.5
billion iShares Russell 1000 Value Index Fund went from $59 to around 8
cents in the blink of an eye.”
Think about that for a moment.
A move like that implies that some of the LARGEST 1000 COMPANIES were
totally worthless.
All of them. For a few minutes yesterday, the markets were saying every
penny was gone!
That’s just pure INSANITY… and it just doesn’t make sense.
It tells you a lot about the madness of crowds. In a rational world,
people would look around and say, “That’s not right.” Buyers would step
in. Markets would stabilize.
But that’s NOT what happened.
Instead, traders got caught up in the selling frenzy. Logic and rational
thinking were thrown out the window. Some investors lost millions in the
blink of an eye.
So what’s the lesson here?
The biggest lesson is to never sell into a market panic. It’s the surest
way to lose big chunks of money. This is why I’m always telling everyone
to stay calm.
Itchy trigger finger sellers who sold at the bottom of the market
yesterday took huge losses. And worst of all, they missed out on the
subsequent rally.
Once the Dow hit the low of 9869, it only took about 15 minutes to
rebound 600 points.
Some investors actually sold out when it was down 1,000!
Many investors think that trading is focused purely on numbers. They
focus solely on revenue, earnings, and valuation. They often forget that
markets trade on emotion. It might fall on fear or rise on greed.
Regardless of the direction, emotion plays a huge role. Yesterday’s
market action is a perfect example of trading on fear.
As a trader, psychology will play a big part in your ultimate success or
failure.
Learning to control your emotions is important. Knowing when to follow
the crowd is just as important as knowing when to step away and go
against the grain.
What else can we learn from yesterday’s volatility?
I’m certain of one thing… Once again, “Wall Street” is going to get
called to Washington. They’re due for another 40 lashings by Congress.
Right now, calls for major financial industry reform are building
momentum.
And that means more risk for not only banks and broker dealers, but also
for the entire financial industry. Be careful if you’re investing here.
Second, the market started off the day heading lower because of problems
with Greece. Those problems haven’t gone away. It means the European
markets will continue to be touchy… and it also means the Euro has
farther to fall.
So what should you do?
If the volatility is too gut wrenching, there’s nothing wrong with
taking some money off the table right now. Yes, we’re down from the
highs, but if you can’t sleep at night, there’s no sense in staying with
the markets. Lighten up some positions.
And don’t forget to monitor your hedged positions. If you own puts on
the Euro, puts on the market, or you’re long gold, you’re sitting on
some nice gains right now. If you don’t have any ‘hedged’ positions, now
might be a good time to put some on!
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• Crocs (CROX) was upgraded to a “Buy” by DA Davidson
this week. The footwear maker received a $15 price target.
• Thompson Creek Metals (TC) was downgraded to a “hold”
rating by Deutsche Bank. With commodity prices falling, the mining
company could see weakness in the next few months.
• Sterne Agee just rolled out coverage on two key technology companies,
Micron (MU) and SanDisk (SNDK). When
the markets start rebounding, tech should lead the way.
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