Where Were You During the Crash of 2010?

With the S&P 500 trading down 3.26% on the session, off 37.94 points, one would think that long stock holders would be heading home with their head hung low—that’s not the case today. If you are a long stock holder, or a short vol trader, or a short Gold/Bond/U.S. Dollar trader you are heading home today happier than ever that the market only stayed at its low on the session, 1065.79, for roughly half a second. For the record, at the markets low: •The S&P 500 was trading lower by 100.11 points, off 8.58% on the session. •The Dow Jones Industrial Average was down even further on a percentage basis, logging its worst one-day point decline in HISTORY. •The CBOE Volatility Index (CBOE: VIX) reached a high of 40.71, closing at 32.80, up 31.67% on the session. •Gold prices, as measured by the SPDR Gold Trust (NYSE: GLD) spiked higher by nearing 3.00% and closed on its highs at $118.48. •Odd trades occurred across the board including P&G (NYSE: PG) trading down from $62 to $39.37 then back to $60.75, as well as Accenture (NYSE: ACN) trading down from $41.00 to $0.01 then back to $41.09. •Shares of Apple Inc (NASDAQ: AAPL) hit a low of $199.25, down 22% on the session before rebounding. Many are positing that the market sell off was due to a “fat-finger,” where someone meant to trade a “million” shares and punched in a “billion” shares; this may be the case, though it is unlikely that this trade occur in Proctor & Gamble (NYSE: PG) as many are speculating—CNBC is simply using that as a proxy because the news anchors at the time, Erin Burnett and Jim Cramer, were watching the name. The real problem more than likely occurred in electronic trading in the S&P 500 E-mini Futures contracts. This would create more contagion than a single stock because the E-mini contract is the most widely traded futures contract by program based and high-frequency based trading systems (take my word for it…I’ve done work for high frequency firms). An input error in the E-minis could, theoretically, force supply onto a thin market, sending futures down and in turn triggering technical and algorithmic selling in humungous size—instantaneously. This happens because high-frequency trading is coming into vogue so much that everyone and their brother thinks that if they write a program to buy/sell securities and/or futures around movement through moving averages they will become rich. This is not too say that a specific set of circumstance was not in place that was able to breed this panic selling. The market was very, very thin on the buy side with little bids across the downside, which is how we in turn were down 3.00% on the session before the said botched trade. What does this mean for the overall market? Well, there are some positives that have come out of it all. For one, things got a hell of a lot cheaper in a hurry. Even if you weren’t fast enough to pick up stocks that were being puked up during this middle of the session, there are still stocks on sale out there. High-Yield corporate bonds also saw their yields blow out as people needed liquidity; in fact, this is my favorite play. My fund of choice is the American Funds High Yield Fund (AHITX), though ETFs like the HYG, LQD, and even the JNK represent similar opportunity. One other positive after today is that traders as a whole woke up and were shaken. Animal instincts started to take over and buying flooded the market, many thinking that if they did not get in now they would miss the trade of the quarter. This is important—remember that people panic into stock just as they panic out of them. We need this right now; it will help support dull, bearish trading. So what happens now? More than likely, those that have significant risk on their books will be taken out back and shot; well, in the trading sense of it anyway. This means that their positions will be sold out from under them at the open tomorrow and at the margin call window around 1-2pm est. So watch for the potential drive around these time periods and be ready to step up and buy something. Buy anything! Find that stock that has been on your radar for a while, but you thought you would get in just as the elevator was heading lower. Oh yeah, elections occurred in the UK today and the Greek Government signed their Austerity Bill, but frankly none of the huge news moved the tape today.