Sunday, June 11, 2017

Stock Market: What Caused Friday`s Flash Crash In Tech Stocks?

(Drivebycuriosity) - Maybe last week´s Friday`s stock market performance will be discussed a long time. Something rare happened: A flash crash. Fortunately the phenomena was limited to the  technology stocks sector.

                                                              QQQ = Nasdaq 100

Shortly after opening technology stocks started dripping. In the following hours the drop accelerated and minutes before 3 pm the movement turned into a sharp fall, only to recover most of the losses by the closing bell. Above screenshots from the QQQ which represents Nasdaq 100.

                                                        Feral Hogs

Some stocks, including Facebook, Alphabet (Google), Netflix & Amazon, got even hit harder. Above screenshots from Amazon`s performance of Friday. Amazon opened at $1,012,50, close to the all-time high ($ 1,016,50), shortly before 3pm the price suddenly plunged to $927,00 - a intraday loss of about 9% -, but recovered to $978.31 at closing bell.

It seems that many investors got spooked by the recent stock market gains and the all-time-highs. After Friday´s close the Nasdaq 100 had still a gain of 18% year-to-date & 28% y-o-y. So many took some money from the table (profit taking). Crowds behave unpredictable, sometimes many do the same. It seems that the slow slide animated more investors to take profits, apparently this encouraged hedge funds and other short sellers to amplify their bets against the stock market. So the slide accelerated, causing more selling - typical herding behavior. Falling stock prices also triggered stop-loss-orders. Many professionals set these sell orders to prevent further losses. Apparently short before 3pm all these factors came together and triggered a sudden implosion of the tech sector. But reduced stock prices attracted new buyers and so the stocks could recover the most extreme intraday losses.

Crashes are typically mass market phenomena caused by herding behavior. A crash is a special type of a stampede. The phenomena is known from cattle - and other herd animals - which sometimes panic all together and trample down everything which is in their way.  Lemmings are another infamous example of self-destructive crowd behavior. Stampedes are a violent form of herding behavior, the members of a group suddenly behave all in the same way. It is known that hedge funds behave as a herd, they buy what others buy and they sell what others sell, so they are amplifying their behavior.

It is possible that some hedge funds and other groups of short sellers had tried to use the slide for their purpose. Many of them have been betting against the stock market for a while. Maybe they had sensed a chance and had pooled & intensified their sales shortly before 3pm in order to trigger a market collapse. Federal Reserve member Richard Fisher (Dallas Fed President) described these groups as " big money" that "does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they go after it"  (marketwatch ).

                                                                   S&P 500

                                                               Dow Jones

If it was the intention of the feral hogs to cause a full fledged stock market crash - similar to the famous crash of 1987 - they failed. The sharp losses of the technology sector did not spread over the full market. Above & below are screenshots from the S&P 500, the gauge of the US stock market, which was almost unchanged (minus 0.08% ), the Dow Jones even had a gain of 0.4%.

It seems that the broad market got saved by bank stocks which soared on Friday. They got a boost from the Trump administration which reduced a costly bank regulation (Dodd-Frank banking law).

I think that Friday´s setback for technology stocks was unjustified because the sector has fast growing earnings and strong perspectives (driveby ).

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