Flash locks are getting faster

I’m a neat freak, so occasionally I clean my desk and reorganize.

While doing this earlier this week, I came across an old Life magazine that a reader had sent me a few years ago.

It’s from June 1962 and the stock market was the cover story:

The pictures are fantastic.

That was the idea of ​​the story:

The signs, like the sounds of a pack of alpine ice at the moment of thawing, had been heard. The glacial heights of the stock boom suddenly began to melt into a selloff. More and more stock went up for sale, with fewer and fewer takers at the asking price. Then, suddenly, around lunchtime on Monday, May 28, the sales swelled to an avalanche. On a frenzied day at US brokerages and stock markets, stock values ​​- glamor and blue chip alike – posted their biggest drop since 1929.

By the spring of 1962, the stock market was already in the midst of a double-digit correction. Then, on May 28, there was a quick crash, sending the stock down nearly 7% in a single day. It was the biggest one-day selloff since the Great Depression.

Why did it happen?

Here is the explanation from the article:

There can only be one real answer: the market went down because it had gone too high.

Why the market went so high and then chose this particular moment to stumble goes into some mysteries of human psychology. Every student of the market knows that the price of stocks at any given time depends more on the mood of the investor than on anything else.

Sometimes the reason stocks go down is because they went up too much in the first place. There was a massive bull market in the 1950s. Investors were probably complacent and needed a rematch.

The stock market can act like crazy in the short term because human emotions are fickle.

It’s becoming increasingly clear that last Monday’s stock market swoon was also a flash crash. Since August 5, the S&P 500 has fallen more than 6% for the month. He is now positive in August.

I’m not ruling out further volatility in the future, but that mini-flash crash looks like a hell of an investor moment. There are all sorts of macro reasons we can point to for that craziness – a slowing labor market, Japan raising rates, the trade war, a possible misstep by the Fed in monetary policy, etc.

But the most logical reason for last Monday’s stock market turmoil is that the market fell because things were too calm. The stock market cannot remain calm forever.

Flash crashes happened in the 1920s, they happened in the 1960s, and they happen today.

The biggest difference between now and then is the interconnected nature of global markets. You have computer and algorithmic trading. Information flows at the speed of light. Every piece of economic data is analyzed in real time with a fine-toothed comb.

Overreactions can happen much faster now.

Look at the biggest gaps of the past 40+ years:

This chart shows the biggest difference between the stock market’s opening price and the previous day’s close. All occurred in this decade except for the crash of 1987.

We had the third largest VIX peak ever during a 9% correction:

This was a burst of financial crisis-level volatility, and we didn’t even hit double digits on the discount.

I can’t predict the future, but I wouldn’t be surprised if these types of events occur more frequently in the future.

Human nature is the only constant in all market environments, but we no longer transact with commercial notes and handwritten blackboards.

The information age has added a Barry Bonds level of HGH to human nature in the markets.

We are likely to see more of these fast crashes in the future due to a combination of increased leverage in the system, globalized markets and computer trading.

The hard part for investors is that it is now easier to lose control during these types of market events. You don’t need to call your broker on the phone to place a trade. You can change your entire portfolio from your phone with the push of a button.

Just because the markets are getting faster doesn’t mean your decisions need to be made faster.

In a world that is accelerating by the day, it’s more important than ever to take it slow when it comes to your investments.

Michael and I talked about flash crashes and more in this week’s Animal Spirits video:



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Further reading:
Minsky Square

Now here’s what I’ve been reading lately:

Books: