Tuesday, September 30, 2008

The First Stock Market Crash of 2008

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog: http://www.youtube.com/watch?v=CCt8d6zsjQI

Monday witnessed the biggest point drop in U.S. stock market history. While the carnage was brutal, it was by no means final and the market bottom is still waiting for us somewhere in the future. Some of the worst hit stocks were the financials (down around 13% as a whole), despite the ban on shorting them - a ban that was imposed by the SEC because manipulative traders were supposedly driving their prices down artificially (so much for that theory). Gold, the ultimate safe haven in times of crisis, was up over $20, while economically sensitive oil dropped an even greater percentage than the Nasdaq.

While the point drops were the greatest ever yesterday, the largest percentage drop is still the 1987 crash when the Dow fell 22.6% in one day (the Dow dropped 23% in two days in 1929). The Nasdaq's drop of 9.1% (200 points) yesterday can't match that drop, nor can the S&P 500's drop of 8.8% (107 points) or the Dow's drop of 7.0% (778 points). Both the Dow and the S&P would have dropped more if the ban of shorting financials didn't exist and may have even exceeded the Nasdaq's losses. As has been the case for a few months now, small caps fared better than the big caps. The Russell 2000 fell only 6.7%, less than all the other major indices.

Examination of the intraday charts show that even though the market was mostly falling the entire day, there were two notable periods of sharp selling. The markets opened on a sour note because of three major bank failures here and in Europe and continued dropping gradually until it became apparent that the Wall Street bailout bill would fail. Then the floor fell out. Only five minutes later the Dow was down and additional 400 points (and the other indices a proportionate amount). Stocks quickly attempted a recovery in immensely volatile see-saw action and started drifting down again toward the end of the day. The Nasdaq hit an air pocket at the close, dropping 35 points in only a minute. The Dow, because of the market making system on the NYSE, couldn't print a final quote at 4:00 because of unresolved trades. There were huge sell-on-close orders (institutions were desperate to get rid of stocks) the last of which were processed at 4:15. The Dow fell around 200 extra points during this extended closing action.

It is not surprising that gold went up while the stock market was tanking (if you look back at what happened the day of the 1987 crash, you will see that a number of gold mining stocks actually were up on the day, there were no ETFs at that time). Not only were traders buying gold yesterday because of the crisis in the financial system, but there were also inflationary reasons as well. The U.S. Federal Reserve pumped $630 billion in liquidity into the system on Monday. This was planned before the Wall Street bailout bill failed and was being done because of the bank failures that had taken place overnight. This amount of liquidity is enormous (and possibly the most ever) and under ordinary circumstances would have resulted in a huge stock market rally. Apparently ordinary circumstances no longer apply to the U.S stock market however.

NEXT: The Next Banks and Brokers to Cash Out

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.