Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Thursday, May 6, 2010

Today's Ridiculous Performance and Lessons From It

I had the misfortune of being at a very boring series of presentations when all hell broke loose today, but I've read enough about it now to make some comments on it.

Whenever you are going through a period of market stress like we are, the market is vulnerable to truly massive daily swings. It's similar to setting off a firecracker behind someone suffering a panic attack. Today, there were some, to put it bluntly, bullshit trades that rapidly sold off major issues such as Procter and Gamble by ridiculous amounts. Just in case you don't know, P&G at one point today fell from $62 a share to $39 a share on absolutely no news whatsoever. On a stock with 2.9 billion shares, that erases $67 billion in market value in an instant. When a stalwart like P&G drops that much, many programmed trades will be slated to sell as well largely because that big of a drop in P&G leads to a major decline in the DJIA and S&P 500.

Additionally, those not engaging in program trading will get extremely afraid and they will liquidate. Of course, at those discounts people will rapidly come in and snap them up. Accenture(ACN) getting knocked down to a penny a share will trigger buying, for instance.

Now, what should you do in periods of market stress, such as when we are worried about a rolling series of European sovereign debt defaults? The answer is that if you have some stocks that you are looking at and want them at lower prices, keep some long term limit orders out there at 10-15% discounts. If the panic trades don't occur, no skin off your nose. If they do, you make out pretty big. The trick is just to make sure that you don't commit more than your brokerage balance.

Because we have had a fairly sharp decline in the past several days, there is the possibility of margin calls tomorrow or early next week so there is the possibility of a less dramatic, but longer lasting repeat of today. The European debt crisis is going to come to a head in a hurry. Right now if you have a cash position, such as myself, start looking at some stocks that you have been eyeballing, but have not been enamored with the prices. Put out some low limit orders (though don't do 30-45% discounts) on your favorites. 5, 10, 15% discounts are probably good ideas right about now.

If you don't want to be as adventurous, there is the possibility that there may be some modest gains left in treasuries, for which you can buy TLT. This, in my opinion, is not the end of this Euro-induced panic yet, but the worst of today was, well, bullshit.

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