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A Second Round of Recession or Major Correction?



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May 21 2010
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U.S. Securities and Exchange Commission (SEC) still has not discovered or explained what triggered the now infamous 1,000 points plunge on May 6, 2010enough to wipe more than US$1 trillion in U.S. market value. The 9.2% drop was the biggest intraday percentage loss since 1987 and largest point drop ever. This event may have already happened 2-weeks ago but the after-effect has since haunt the global stock markets even till today. What really happened on that day that caused such a bloody panic in the financial markets?C, stock) that one of its traders was the culprit with the errorenous trade involving E-Mini contracts (index futures contract) – hence the name “fat finger” trade.

Surely it can’t be the tsunami selloff triggered by Europe’s debt crisis because every Tom, Dick and his dog knew about Greece’s crisis. Furthermore wealthy European countries had promised to rescue (more like a bailout though) Greece so why the sudden paranoid? The sell-off was broad and deep with all 10 of the S&P 500 sectors falling from 2 percent to 4 percent. Some traders were cruelly awaken from their beds and told to start trading (causing further selloff).

Dow Jones crash 20 May 2010

Some said it was due to computerized trade glitch. Some said it was due to traders manipulation on the day by triggering the selloff hoping to pocket huge profits. Procter & Gamble Co. fell as much as 37% (to $39.37) before recovering with a loss of 2.3% on that day. Some said it was exacerbated by erroneous trades that showed some shares briefly fell to nearly zero, which is illogical obviously. Rumor was hitting Citigroup Inc. (NYSE:

Regardless of the real culprits, the NYSE is toying with the idea of having “circuit breakers” to all U.S. stocks by end of this year (2010). The circuit breakers will halt trading in a stock for five-minutes if it falls more than 10% within five minutes – a step to prevent a repeat of the May 6 mysterious slide. But is this a little too late?

US Stock Market 20 May 2010

Ever since Dow Jones skyrocketed to above 11,000 points, analysts have been talking about correction. Despite weak unemployment report Dow Jones had been performing spectacularly. People thought the worse is over for the U.S. economy and ignore the problem of unemployment. Stocks were pushed up too fast and too much. The May 6 DJIA plunge thus provides the analysts and traders the best excuse to starts the major correction. And the Dow was never able to touch the 11,000 mark since then. This morning (Friday, 20th May 2010) trading session has seen the Dow plunged by another 300 points and it seems the 10,000 points will be tested soon (at closing Dow was down 376 points).

Equities Market

So, are we going to experience Round-2 of global recession again, the one that pull Dow Jones from almost 12,000 points to almost 6,500 points in Mar 2009? Well, if you believe in Murphy Law then the prospect of Dow going south is very high indeed. The repeatitive mention of Portugal and Spain joining their buddy Greece’s debt problem is sufficient to spook the bravest traders into selling their stocks. Throw in more goodies into the package such as China’s potential bubble, Thailand’s violent protest, North and South Korea’s potential war, Dubai World’s debt and you could even convince your dog that the end of the world is near.

Right now if you asked the traders they would tell you to sell or short and nothing else. They’re surprisingly the first to go into panic mode. And when they start panicking the whole world follows with the exception of some clueless Malaysian politicians who thought they’re still living in a lonely island. Yes, this is a “Major Correction” and No, the “Second Round of Recession” or second Credit Crunch is not coming. Unless something as big as U.S. subprime crisis blows off in the largest economy powerhouse, the second round of recession should not happen – not even Greece or Portugal or Spain could triggers it.

Dow Jones 2 year chart

The simple fact is neither U.S. nor other rich European countries can afford to fold their arms and enjoy seeing their neighbours collapse into ashes. They would bail them out although it was due to the countries’ own mismangement (corruption) in economy. There’s no Lehman Brothers effect in this round of bear market, at least not yet. And the oil prices are not tumbling from US$140 to US$40 a barrel, mind you. So what shall you do?

We’re actually at a critical decision-making stage – either the market will rebound hence confirming the 10,000 points as the Dow’s safety net or the bear will enjoy its bungee-jump. So you can either decide that this is the opportunity to buy at the low or perhaps place your bet several notches down to scoop cheap way-out-of-money Put-Option. The latter of course means you’re anticipating a long deep V-correction before things can get better. Heck you can make much more money in Bear than Bull market especially if the bear decides to plunge further because in a panic market, the sellers would sell in lighting speed as if there’s no tomorrow.

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Comments

are you gonna start to accumulate some blud chips stocks? do you think now is a good time to enter the market?

This is nice an excellent blogs post, its interesting.

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