SOS Flash Crash

Don't Let September's Rally Trick You

Flash Crash Findings

On May 6 the Dow opened at 10,862.22. Its intraday low came in nearly a thousand points lower at 9,869.62. And the closing price was 10,520.32. This roller coaster was immediately named the "flash crash." And it left many pundits demanding an explanation as to what might have caused this unusual event.

A mutual fund's single sell order was behind the infamous "flash crash."
Now the findings of the SEC and CFTC are in. And they're very frightening: Nothing special had happened! Yes, there was a $4.1 billion stock-futures sell order ... 75,000 E-mini contracts that mimic the movement of the Standard & Poor's 500-stock index ... by a mutual fund company. Although relatively large, it was a normal hedging activity using a computer-generated program.
But since the market was already nervous due to Europe's debt crisis, this order pushed the market into a tailspin.

This finding is exactly what I had expected ...
In my June 9 Money and Markets column, I called the flash crash a warning crack, typically occurring at the end of a huge bull move. It was indeed a warning sign that the bullish forces are fading and a hallmark of a forthcoming bear market.

I also told you to take the flash crash as a harbinger of what this coming bear market will have in store for us. And last month's gain only makes my argument all the stronger.

Best wishes,

Claus

MyView

In May 6, DJIA dropped 1,000 points in a day. Will it repeat? What does it tell? Should we be in this volatile market?