Friday, May 7, 2010

How market perception feeds itself

How a market crashes | Analysis & Opinion |
How a market crashes
May 6, 2010 16:30 EDT

How can the market go, on a random Thursday afternoon, completely insane? The story which is emerging centers on old, boring Procter & Gamble, as can be seen in the PG chart from this afternoon.

pgtips.tiff Look at the volume chart: what you see here is a big block of shares trading in P&G at around 2:30, followed by another huge block right before the market crashed. And then, nothing. The two big blocks were probably sell orders, which were big enough to blow through all the bids in the market. As Henry Blodget says, “for a few minutes, buyers just disappeared”.

It’s worth noting here that none of this data is particularly reliable: the Nasdaq is reportedly confirming that there were technical problems with the P&G quote, and there are persistent rumors of a “fat finger” trade as well, which I’m not sure that I believe.

This was what I was talking about. Short-term, market sentiments determines the price. Long-term, fundamentals determines the value. All it takes is market perception to take a turn for the worse, someone starts selling, market participants see the panic selling and joins in the fray (either because investors emotions of fear or traders taking advantage of short-selling). Computer programs see a certain decline in price and starts selling.. and the death spiral begins and feeds itself.

As I am still in the money for my portfolio, I will monitor the situation and hopefully, this weekend, ECB do something instead of saying something and help change market perception.

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