The stock exchange, a barometer of fear

May 26th, 2010

What will it do today?
Fear rampages through the stock exchanges leaving a trail of slumped stocks and frightened investors. Yesterday it got so bad that the Dow dropped to 9774 before rallying to close at 10,044! Remember the excitement when it broke the 10,000 barrier? That was not so long ago.

The fear
The fear comes from many fronts. The latest is the saber rattling of the North Koreans. There’s that awful oil leak in the Gulf of Mexico that no seems to know how to fix. There are ongoing threats and promises from every country in the Middle East with Iran’s Mahmoud Ahmadinejad jabbing pins into the Western world. Just about every country in Africa is locked in civil war. All this puts fear into the hearts of the investors and they start selling their stocks, bonds and other financial holdings, causing the market indices to drop.

More fear
There is other fear that pervades the trading floors as well: President Obama makes a statement about taxes – market drops; The Prime Minister of Israel makes an announcement – market falls; the unemployment figures are published – market crashes.

Positive
Something positive happens – market rises. Take today’s news: “Stocks rose Wednesday after gains in durable goods orders and home sales helped reassure traders that a rebound is occurring.” Or unemployment is down and market is up. The market has a permanent case of bad nerves and reacts violently to the slightest change in the news. With all this fear in mind, the overall situation is still rosy – the market is not doing badly, but then we are in the aftermath of a massive drop and a stunning recovery.

The markets
The markets seem to be directly connected to the news channels like CNN, BBC and Fox and get the shakes and plummet viciously at the first sign of nervousness or fear, almost as though they have been waiting for an excuse to drop, or as though they have been waiting for the bears to make their appearance. The bulls stand back politely and watch their good work being undone and the result is chaos. Chaos works well – it ignites further fear and chaos.

Crash!!!
Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism, a market where P/E ratios exceed long-term averages and extensive use of margin debt and leverage by market participants. But it is fear and confidence in a hundred different situations that drives the market up or down.

Flash Crash
Referred to as the “Flash Crash” on May 6, 2010, the Dow Jones dropped almost 1000 points. Starting at 2:43 pm Eastern Time, the DJIA began to sell off at a furious pace with high volume. At 2:48 pm, the DJIA hit a low of 9872.

This entry was posted on Wednesday, May 26th, 2010 at 10:42 am and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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