By: Steve Dellar | 12-28-2018 | News
Photo credit: Twitter @DailyExpress

Stock Market Mayhem “Like Watching Pulp Fiction”

The year 2018 is ending with a proverbial rollercoaster on worldwide stock markets. Over in the US, after seeing the biggest price fall on a Christmas Eve ever in the Dow, the biggest price increase in points ever (1,086 points) came afterwards on Boxing Day. Then on Thursday, the 122-year old Dow first plummeted with 600 points to finally close 250 points higher.

Mr Bryce Doty, SVP at Sit Investment Associates, said it best when he told Bloomberg: "It’s like watching ‘Pulp Fiction.’ Halfway through, the violence doesn’t even bother you anymore. Investors are becoming desensitized."
The bizarre series of increases and decreases indicate that there is a lot of fear in the market. This is expressed in the so-called ‘fear gauge’ as the nickname of the volatility index or VIX is.

On Thursday, the VIX rose to over 33, the highest level since 2011.

The succession of large price falls and rises has in the past often been a feature of impending doom. Both the crash of 1929, which marked the Great Depression of the 1930s, and that of 2008, which was the beginning of the credit crisis, were accompanied by sharp price falls followed by a spectacular - albeit temporary - recovery.


On October 24, 1929, the Wall Street crash began with a sharp fall in share prices. A recovery followed on Friday, October 25. That turned out to be a feint though.

On October 28, 1929 - Black Tuesday - the Dow fell by 12.8 percent, the second largest price drop ever. The next day another 11.7 percent went off and a bloodbath followed.

But then on 30 October the Dow suddenly increased by 12.4 percent.

That after great declines a great recovery follows, is almost natural. When the prices plummet, speculators grab their chance to get in low. Sometimes traders play even or double. Back in the 1920s, the prices were 90 percent lower three years later.


During the stock market crash from late 2008 to early 2009, the same thing happened. On 10 September 2008, the Dow declined by 7.3 percent, on October 13th it rose by 11 percent and on October 15th the index fell again by 8 percent. The low point was set on March 9, 2009.

Related coverage: Mnuchin Contacts Bank CEOs Over Market Turmoil.

There was a direct reason for the price fall of last Monday: the fact that US Treasury Secretary Steven Mnuchin had contacted the banks to see if they were still willing to lend, given the price falls since October of this year. For many investors that was a sign on the wall: there might be something fundamentally wrong, because just before the fall of Lehman in 2008 Mnuchin's predecessor Henry Paulson asked US banks the same question.

And furthermore, there was also a direct cause for Wednesday's exchange explosion: the fact that the US public had spent a record amount on public holiday purchases, a sign that the economy was still doing well.

Finally yesterday, every little shrapnel of news led to violent price reactions.

Panic button

The year 2017 was one of the most stable in history, with a price shift of more than 1 percent per day only recorded eight times.

This year, and certainly the month of December, the panic button gets pressed on a daily basis. The fear of selling shares too late is exchanged by the fear of getting back in too late.

On Wednesday, when the Dow Jones index rose by more than a thousand points, pension funds alone are said to have invested $65 billion in shares with the idea of missing out on an opportunity. On Thursday, they first pulled their hair out only to wipe away their sweat afterwards.

2018 can’t finish fast enough for some.


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1 Comment/s
Wfdickjr No. 93379 2018-12-29 : 04:04

Well written and thought out. So long as we're looking at history, however, I would point out that every major crash has occurred in September or October never in December as I recall.

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