What The Heck Happened Yesterday?

| May 7, 2010 | 0 Comments

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?

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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Category: Technical Analysis

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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