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2011-08-17

Crashes Always Come Unexpectedly

What did exactly cause the recent sell-off ? There are different opinions among experts - debt-ceiling standoff, US credit rating downgrade, disappointing economic growth statistics, Europe troubles, or all combined together. As usually, it happened suddenly and quickly. There might be at least two ideas why recent declines happen faster and faster. The first one is that investors reaction to uncertainty and tolerance for risk have changed; it takes less and less to scare investors.

The second reason is a fast electronic trading. It allows programmed computers to sell under particular circumstances in milliseconds that develops a temporal disconnection between the actual factors and reasonable market prices - the market overreacts and makes irrational movements before reaching an after-crash equilibrium. As a matter of fact, the latest huge swings with changing directions every day have never been seen before in S&P-500 history.

In new era of globalization, mutual dependencies, and markets interconnection, the system crises turned out to be a new threat to our global well-being. Nonetheless, it seems the investors' expectation now has changed - the US and global economic growth is likely to be less healthy in the near future than previously estimated.

Some resources: Trading Strategies for a Stock Market Crash,
How to Escape from a Bear