Immediately after the DOW plunged 999 points last Thursday, explanations started coming fast and furious.
It was a “fat finger error!.” Some idiot typed “billion” into a sell order when he meant “million”!
Then, when that explanation was debunked, the crash was blamed on all sorts of other computer glitches (stocks trading at a penny!). Then it was blamed on high-frequency traders. And so on.
And now Congress has called hearings to investigate, so surely they’ll get to the bottom of it.
Except that we already know the real reason the market crashed: Because, for a panicked 15-20 minutes, people stopped buying stocks.
Why did they stop buying stocks?
Because, among other fundamental concerns, the market was in freefall. That fact would make a lot of sane folks hesitate before hitting the “BUY” button, especially with Europe imploding, the US recovery disappointing the bulls, and stocks already at least 25% overvalued.
But don’t take our word for it. Read some words describing what happened in OTHER market crashes. Because the way the market behaved on Thursday is how the market usually behaves under such circumstances.
Buyers disappearing? Stocks trading for absurdly low prices? That’s just how markets crash.
Here are John Kenneth Galbraith and Richard Russell, as quoted by fund manager John Hussman. JKG is writing about the crash of 1929, Russell about the the aftermath of the ’73-74 crash. Note that there was no “electronic trading” in those days.
“Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid … Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it.”
John Kenneth Galbraith, 1955, The Great Crash
“I started accumulating stocks in December of ’74 and January of ’75. One stock that I wanted to buy was General Cinema, which was selling at a low of 10. On a whim I told my broker to put in an order for 500 GCN at 5. My broker said, ‘Look, Dick, the price is 10, you’re putting in a crazy bid.’ I said ‘Try it.’ Evidently, some frightened investor put in an order to ‘sell GCN at the market’ and my bid was the only bid. I got the stock at 5.”
Richard Russell, 1999, Dow Theory Letters