Friday, May 7, 2010

On Unemployment, Fat Fingers, and Market Plunges

If you happened to step out for a post-lunch latte in the middle of the trading day yesterday, you might have missed the near 1,000 point plunge in the Dow. If you were long, that would've been a good thing, as you definitely would've lost your lunch at the lows. Although the market rallied back from its lows, all major indices closed down some 3% on the day. The WSJ declares "Market Plunge Baffles Wall Street" as traders and pundits scramble to figure out what on earth would cause our predictable and rational markets that never have large price swings for no apparent reason to whipsaw the BeJesus out of equity players. 1987, 1989, 2000, 2002, 2008 don't count because the market had its reasons. Oh, and the developing Greek crisis, credit spread blowout, and fears of another banking meltdown don't count either because the fundamentals for US stocks are just so peachy.

From what I hear, electronic market makers (high frequency traders etc.) pulled their quotes when a wave of selling triggered stops. With no bids below, stocks plummeted, some to as low as a penny a share before ripping back. While everyone is wondering what fat finger triggered the stops, I'm sort of wondering why anyone would want to buy stocks in a market where the liquidity is so thin that bids disappear right when you might want to sell.

Meanwhile, in economic headlines, nonfarm payrolls were up 290,000, a bit more than economists were expecting. However the unemployment rate jumped to 9.9%. This is somehow being painted as a positive as apparently a bunch of happy unemployed people are choosing to reenter the workforce. That's just fine and dandy that they are no longer discouraged and depressed. But let's just hope they can all find jobs.

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