Why are there flash crashes in the stock market but no flash rallies?

[Martinghoul]

It's an interesting question...

Firstly, during normal times, you could argue that flash crashes and flash rallies should be equally likely. However, crashes that occur during broad economic downturns are more significant as they are reflections of people needing liquidity during times of stress.

 

[tomorton]

Check again. Febr 5th happened only 5 days after the ATH, hardly bearish, yet it was one of the biggest one day drop...

Yes, clearly the 05/02 drop came from a bull market. Yet in % terms, it doesn't even come in the worst 100 days on the Dow since 1900.

 

[Pekelo]

Yes, clearly the 05/02 drop came from a bull market. Yet in % terms, it doesn't even come in the worst 100 days on the Dow since 1900.

I knew you would say that. The answer is, we aren't trading in the 70s-80s, we are trading in the now.

 

[tomorton]

I knew you would say that. The answer is, we aren't trading in the 70s-80s, we are trading in the now.

Well, you brought up the term ATH. Clearly an ATH has to acknowledge all previous time. Or it would just be an H.

 

[Handle123]

Yes, clearly the 05/02 drop came from a bull market. Yet in % terms, it doesn't even come in the worst 100 days on the Dow since 1900.

Flash crashes are more news worthy and put on the big 4 news programs, they will normally lead out with worst depressing stories, and since most newspapers and TV stations are democrat owned, you hear it the loudest with a Republican President in office.

Be that as it may, whichever way news reports can make it seem worst as in points instead of percentage of drop, that's what they will use. Can you imagine one day it will be Dow 50,000 and it drops 2,000 points and people will be going nuts and that only be 4% move.

When people live, they mostly think in negativity first, they don't wake up to it's a beautiful day, they think what sob at work going to mess with them, majority of people are negative, and seems like this forum, we never discuss those who don't post, they too busy working their trading plans or trade automation and make decisions when they come home, or they work for brokerages, props etc.

Reason of flashes crashes is Hedge funds actually hedging and selling thousands of lots of Index futures and buying thousands of lots of Financials, flight to quality, they are long the stocks, so they don't want to exit and lose dividends and selling billions of dollars of stocks would cause financial collapse , if it is extended decline, they have to sell some stocks as people will be exiting the funds. And to dump a billion plus dollars of stocks is no easy feat by one firm and how many Hedge funds in the world? But they have to do what they have to do and sell to generate cash to send back to those requesting them. As far as why no flash rallies, where is Hedge funds going to get the new money in a heartbeat? They only have so much money to buy stocks and they require enough so investors can ask for proceeds to liquidate cause Johnny needs new shoes. Indexes do go up pretty nicely when Hedge funds get out of the hedges by buying and some will buy even more to get some of the extension of recovery to making new highs or very least decent percentage of the drop.

So I believe it is supply and demand of cash on hand.

 

[jinxu]

Reason of flashes crashes is Hedge funds actually hedging and selling thousands of lots of Index futures and buying thousands of lots of Financials, flight to quality, they are long the stocks, so they don't want to exit and lose dividends and selling billions of dollars of stocks would cause financial collapse , if it is extended decline, they have to sell some stocks as people will be exiting the funds. And to dump a billion plus dollars of stocks is no easy feat by one firm and how many Hedge funds in the world? But they have to do what they have to do and sell to generate cash to send back to those requesting them. As far as why no flash rallies, where is Hedge funds going to get the new money in a heartbeat? They only have so much money to buy stocks and they require enough so investors can ask for proceeds to liquidate cause Johnny needs new shoes. Indexes do go up pretty nicely when Hedge funds get out of the hedges by buying and some will buy even more to get some of the extension of recovery to making new highs or very least decent percentage of the drop.

So I believe it is supply and demand of cash on hand.

I kind of don't think this is what's happening. It implies that hedge funds as a group are working together to manipulate the market.

 

[tomorton]

I kind of don't think this is what's happening. It implies that hedge funds as a group are working together to manipulate the market.

Its refreshing to read this.

But whereas I don't think the funds work co-operatively in these situations, I believe they all move in the same way like a shoal of fish. There's no leader, no conscious consensus, its just none of them wants to be outside the shoal.

 

[Pekelo]

For the discussion, a flash rally is when price suddenly runs up huge just to quickly reverse and get back to the previous level.

Couple of points:

1. There are flash rallies in other markets, oil and natural gas are famous for it specially around number releases.
2. Certain stocks also can have a flash rally on a rumour what is later to get proven incorrect, then price goes back to the same level.
3. The market as a whole also can have huge rallies, some of its biggest move ever were rallies, not drops. But these are not flash rallies, they usually follow through with an up trend.

So that being said, the answer is psychology. The chances of a sudden good news breaking that lifts the WHOLE market that eventually isn't true are very low. On the other hand bad news are just around every corner, and lots of traders sell first and ask questions later.

But I am sure I could find flash rallies if I look hard, they are just less likely to happen. It used to happen around Fed meetings, for 30-60 mins the market was very happy just to reverse later on. Febr 7th looks like the Dow was up 450 points just to close it at break even...

 

[Maverick74]

There was a major flash rally in equities that was of epic proportions. I'll offer a cookie to anyone who can identify it. We'll find out who really trades on this forum now.

 

[JackRab]

There was a major flash rally in equities that was of epic proportions. I'll offer a cookie to anyone who can identify it. We'll find out who really trades on this forum now.

In 2008, I think on the September expiration Friday, European stocks all gapped up massively. Not really a 'flash' rally though. Biggest broad market gap I've seen... That was definitely epic in my book.

And the Knight Capital error blew in both directions...