Posted by Shyam Moondra
Today, the stock market started out on the defensive because of the continuing saga of the debt problem of Greece and other EU countries. By 2:30 pm, the DJIA was down by about 250 points. However, at around that time, the market literally fell like a rock and within minutes it was down by more than 1,000 points. But then, by 3 pm, almost like a miracle, DJIA shot up by almost 700 points and finally ended the day with a loss of about 350 points.
Early reports indicated that Proctor Gamble stock (ticker symbol PG), which is one of the 30 components of DJIA, traded at some other exchange at about 37% lower price than its last price on New York Stock Exchange. That dramatic decline in PG triggered computerized sell orders by big players that are linked to the movements of DJIA's 30-component stocks. It's not clear who placed that particular PG order. One other story appeared in the media saying that one trader erroneously placed an order to sell $15 billions worth of stock when he/she actually meant to sell only $15 millions worth.
Some analysts compared today's market movement to the crash of October, 1987. However, this time what is starkly different is that the market didn't just crash but it quickly rebounded and that raises some troubling questions.
One theory is that the above mentioned erroneous trades were in fact intended to engineer a crash so some big financial institution or hedge fund could cover their short positions or close options at a huge profit. The sharp turnabout in the market after the crash was caused by short covering by this culprit financial institution. If this theory is proven right then we can safely say that smart people on the Wall Street (who designed synthetic derivatives) outsmarted the regulators one more time.
The U.S. Department of Justice and the SEC should investigate to determine if today's sudden fall of the market was manufactured by someone to profit from the decline. The regulators also need to design a protection mechanism to prevent this kind of stock manipulation in the future. The cost of the abnormal behavior of the stock market is staggering; many individual investors got panicked and they started dumping their holdings in stocks and commodities and moved to safer investment vehicles such as gold and treasuries. The dramatic decline wiped out $1 trillion worth of equity within minutes. NASDAQ just announced that the trades in stocks that moved yesterday by more than 60% after 2:40 pm would be canceled. This may seem like the right decision, but the downside is how could investors be ever sure which of their future trades would be honored.
The overall market, having gone up from 9,800 to 11,300, was due for a correction. That correction is now largely behind us. Given excellent corporate earnings, low interest rates, and low inflation, we are in a long-term bull market which would last for several years. Today's overreaction in fact affords an excellent opportunity to buy for the long-term. We are headed to 12,000 during the summer and to 13,000 by early next year. By the end of Obama's first term in office, I wouldn't be surprised to see DJIA at a record high of 15,000.
