Dynamics of a Crash

Spectre2007

Spectre2007

1) Market
2) Market Participants
3) Market Catalyst
4) Leverage
5) Speed of Execution


What I've observed over the years, if the market conditions are viable, equities on the whole are upwardly biased. And become barometers of sentiment of the American public.

Market participants become segregated in terms of speed of execution and leverage. Into small retail, to large money pools, what percentage of the daily turnover in volume on exchanges is conducted by retail versus large money pools/institutions, I'm not sure of. I would have to think that retail turnover is pretty low, and decision making skills are based on emotional extremes.

Whereas institutions are constantly in the market making decisions and speed of execution is unrivaled. So when news headlines are filled with losses and pessimism, it causes a shift in retail to enter the market and do what is most implied by the news events, sell low and buy high. Institutions on the whole, do the samething but speed of execution raises the bar above retail.

If the aggregate decision making leads one to sell and selling abates, the leverage taken to the downside needs to be lifted very quickly. Such as short interest, since on the whole short interest can only capitalize on short bursts in pessimism. Since speed of execution is unrivaled by institution and program trading. Retail or smaller parties is forced to buy at a premium to to the bar institutions have set it to. Thus shorts become cornered.

If media executives can control the headlines to fill it with pessimistic news, then longer periods of declines can be entertained. So the question becomes.

Based on the present information and set of conditions, how long can the same news lead to sustained selling. Last year we had the middle east crisis with cities being bombed from above filling the airwaves. This led to the continued persistence of pessimistic mood.

The safest thing to do would be to let the news playout but when further declines are failed to be realized with the same news, then watch for the bid to be raised very quickly. The short interest would be forced to cover at blown out highs on the indicies.

http://bigpicture.typepad.com/comments/2006/06/short_selling_s.html

cool analysis at this site.
 
A few random thoughts.

Hedge funds/Program traders are more active than mutual funds. The typical institutional "investor" isn't any more trigger happy than many retail investors. He's just bigger. Being an under weighted long in a bull market is a bigger sin in fund world than getting clocked on the declines.

At the end of the day stocks primarily care about earnings vs. fixed rates of return. Only rare, severe changes in geopolitical climates spark macro effects on valuations.

While without doubt there's ton's of folks short stocks, short interest figures are a tough sentiment read. Those shorts can come in many differing stripes. They can be short against derivatives, short against better performing issues or as we saw in the 90's some shorts are not short at all but offset longs by shorting in other accounts as tax deferral schemes.

Increasingly complex intermarket strategies have rendered short sale figures, put call ratios and even odd lot activity into the virtually useless sentiment category.
 
Wikipedia has this topic right on target. First, how many crashes have their actually been in the 100+ years the stock market has been trading. Two (2). How many discussions do we constantly have on elitetrader about crashes? Uncountable.

The 2000 bubble wasnt really a crash, but a decline that took several months to achieve. The February drop wasnt a crash but a swift and sudden correction. May 2006 wasnt a crash, but a correction as well.

http://en.wikipedia.org/wiki/Stock_market_crash

The points made in wikipedia about crashes is the following:

- A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market.

- Crashes are driven by panic as much as by underlying economic factors.

- They often follow speculative stock market bubbles.

- They usually occur during a prolonged period of rising stock prices and economic optimism, a market where P/E ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.

My question is why do we have to talk about crashes all the time on elitetrader if they have only happened twice in history? Why dont we talk about more constructive things that will make us better traders?
 
Quote from michaelscott:



My question is why do we have to talk about crashes all the time on elitetrader if they have only happened twice in history? Why dont we talk about more constructive things that will make us better traders?
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Cause we will probably have to see 1 or 2 crashes in our trading lives that can make the difference between a profitable trader and a profitable trader gone broke.

Off course, it is better to focus on "normal" trading conditions but you have to take the possibility of a crash into account.
 
Quote from michaelscott:


My question is why do we have to talk about crashes all the time on elitetrader if they have only happened twice in history? Why dont we talk about more constructive things that will make us better traders? [/B]
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a crash makes people more excited, also there are many losing shorts who are hoping for a tank.
 
Well, lets say there are 20 trading days a month. I know there might be less or more, but for arguments sake, lets say the market trades 20 days per month.

20daysX12 monthsX100 years= 24000

Number of crashes=2

1 in 12000 chance.

Actually, the stock market has been trading for considerably longer and there were times when the market traded 6 days a week. So the above odds are even greater.

Odds of bowling a 300 game: 11,500 to 1

Odds of an American speaking Cherokee: 15000 to 1

Odds of injury from using a chain saw: 4,464 to 1

Odds of being murdered: 18,000 to 1

Odds of being considered possessed by Satan: 7,000 to 1

Odds of a person in the military winning the Medal of Honor: 11,000 to 1

Chance that Earth will experience a catastrophic collision with an asteroid in the next 100 years: 1 in 5,000

Chance of dying in such a collision: 1 in 20,000



Plus, if the market crashes, I think you will be looking for a regular job rather then depending on trading. How many traders during the 1929 crash went back at it at trading again? How many traders went back at it after the 1987 crash? During times like these, I think many traders would be calling it quits.

Quote from TraDaToR:

Cause we will probably have to see 1 or 2 crashes in our trading lives that can make the difference between a profitable trader and a profitable trader gone broke.

Off course, it is better to focus on "normal" trading conditions but you have to take the possibility of a crash into account.
More...
 
MS do you have a life..... beyond statistical probability and the game of chance?????????


I always enjoy your threads and SiSi contrite and humorous responses
 
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