Monday, May 10, 2010

The Question Isn't The Drop, It's The Pop - Fat Finger Fed

Everyone is talking about the 1,000 point drop last Thursday - how could it have happened? How do we prevent another one? All the while ignoring that the drop wasn't an out of the ordinary event (unless you believe markets are efficient in the short term....they are not) - it was, as I alluded to the day it happened, the evaporation of liquidity (buyers). These dislocations happen. The question for me is not why the market dropped - there were plenty of reasons that could have been given (of which none of them as glorious and ridiculous as the Fat Finger). The question is who created the "pop"? Who was behind the insanely quick turnaround? My hunch is that in fact there was a Fat Finger and its name is the Fed.

Call me a conspiracy theorist, but the speed that liquidity returned to the market after the free fall panic was unlikely to occur without a catalyst and I believe that catalyst was in fact the Fat Finger Fed who jumped into provide liquidity. Is it no irony that the day the market dropped 1,000 points and then suddenly rose 700 was the day that the Fed Audit amendment died?

Perhaps its all coincidence. What last week hopefully did was show investors that the markets are still risky and volatile (on both sides).

Scott Dauenhauer CFP, MSFP, AIF