No one cares whether yesterday’s record drop in the Dow (DIA) was a fat finger, a mechanical error on Wall Street, or a legitimate breach of a widely watched support level (1144) on the S&P 500 (SPY). If someone screams “Shark!”, you run.
There are two parts to markets: fundamentals and psychology. Lately, fundamentals have been mixed. The US economy is slightly improving while Europe faces what could be an epic sovereign debt crisis. However, markets have been complacent and have continued to put cheap money to work.
That all changed yesterday. And now that fear is out of the barn, it can go viral without care for causation.
Post traumatic stress can trigger the most primal instincts to protect ourselves. Given the Nightmare on Wall Street during the Great Crash of 2008 when boomers saw their life savings cut in half, retail investors are more likely to sell first and ask questions later. They literally cannot afford to play it any other way.
The fundamentals of the global economy can start to look extremely shitty from the eyes of credit holders in Europe. Add a slowdown in China, and things can quickly sound scary again. If the psychology of fear becomes the shadow of bad economic news, we will be in for a very rocky ride.