Sellers Who Have To Sell

When we see the Dow even on the day until 2:50 p.m. CST and then finish down 200 points, that tells you there’s some serious liquidation going on.  Here’s the way it works.  Joe Investor calls his mutual fund company and says “sell me out”.  The fund is required to sell him out that day.  Now multiply that by hundreds or thousands of phone calls saying the same thing.  The fund manager who is heavily invested in stocks and very light on cash because he has to be per the prospectus needs to sell a lot of shares to raise cash to send to Joe Investor.  So, he starts selling positions in companies he wants to hold but can’t.  The mutual fund manager can sell anytime during the day to raise cash and naturally wants to get the best price for those stocks he/she is selling.  So, he/she waits until the end of the day to see if we’ll get one of those big rallies like we did a couple of Monday’s ago (up 900 points on the Dow). 

At 2:50 p.m. CST, the market’s flat and not going anywhere.  The manager realizes we’re not going up, so they start selling.  The snowball starts and program trading kicks in.  Computer A sees shares falling and it starts selling triggering Computer B to sell.  Then stop losses are hit and we go lower.  That’s how we drop 200 points in 10 minutes.  That’s how the 1987 crash happened.  Now add to that hedge funds who are leveraged to the hilt and to reduce that leverage must sell stocks.  Add to that 401-K investors selling their funds and moving to money market accounts.  All of this is forced selling and what we call selling pressure.  Until the selling pressure subsides, it’s hard to rally for a sustained period of time.  But, it will come.  It’s called capitulation.  We’re obviously not there yet.  Today was lighter volume but the downside volume was 86% of total volume.  So, it was still a strong day as far as the negative internals.

Continue to exercise patience.  It’s tough out there and things are still very dicey.  The two silver linings are lower oil prices which are translating into cheaper gasoline and credit markets are easing up so the greasing of the wheels is starting to work.  Also, the markets are pricing in a .50% rate cut on Wednesday and eventually going to 0% when it’s all said and done.  We’ll see.

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October 2008
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