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T I I M M M M B B E E E R R R!
I read an article from Seeking Alpha, a website which covers the market, in September 2009 titled Five Reasons the Market Could Crash This Fall.  I personally thought the market was increasing based on sentiment and not any long-term fundamentals and Seeking Alpha seemed to quantify my suspicions.  Yesterday the market dropped a harrowing 1,000 points before eventually closing down 3.2%, leaving Wall Street baffled.  The "so-called" experts have given explanations ranging from the crisis in Greece to an erroneous trade which caused shares for companies like P&G to drop 35% in a matter of minutes.  However, (i) the fact that many firms have been growing earnings through cost-cutting measures and earned interest on government bail-outs and (ii) high level headlines and events that destroy market confidence like (a) the pending financial regulatory discussions batted around in the Congress and Senate, (b) oil spill in the Gulf of Mexico, (c) crisis in Greece and (d) the crisis between North and South Korea need to be factored into one's investment decisions.  The five reasons for a market crash provided by Seeking Alpha are as follows, and I wonder if they are still relevant today:

High Frequency Trading Accounts for 70% of Market Volume

High Frequency Trading Programs (HFTP) collect a 1/4 penny rebate for every transaction they make.  They're not interested in making a gain from a trade, just collecting the rebate . . . This kind of nonsense comprises 70% of all market transactions.  The market is no longer moving on "real" orders, but based on a bunch of HFTPs gaming each other and "real" orders to earn fractions of a penny.

Even Counting HFTP Volume, Market Volume Has Contracted the Most Since 1989

Market volume hasn't contracted this much since 1989.  In March 1989 the market experienced a rally.  Since, volume has dried up.  Whenever stocks explode based on next to no volume and poor fundamentals, there is always the risk of a market collapse the first sign of trouble.

The Latest Rally is a Short Squeeze

At September 2009 the market had rallied 48% off of its March lows.  Normally when the market rallies 40%+ from bear market lows the economy is already 9 months into a recovery, which was not the case.  Secondly, in the previous two months short-interest had declined 72%. And those industries that should have been falling the most, given the economy, saw the largest decline in short interest (energy, materials).  The fact that the short-squeeze occurred on very little volume set the stage for a huge correction.

13 Million Amercians Exhaust Unemployment by December 2009

Economic reports about a decline in unemployment can be misleading when people no longer collect unemployment benefits.  The media and the public can mistate this to mean that people are actually finding jobs when such claims drop.  When unemployment benefits are exhausted, it leads to less spending, less revenue, and lower earnings for publicly-traded companies . . . and hence, an eventual market correction.

The $1 Quadrillion Derivatives Time Bomb

At September 2009 the total notional value of derivatives in the financial system was $1.0 quadrillion (1,000 trillion).  Commercial banks alone owned $202 trillion, of which 96% was held by the five largest.  The "notional" value does not measure the actual amount at risk.  But if only 1% was at risk, that would have equated to $10 trillion.  Then assume a certain percentage of the at-risk amount actually defaulted . . . get the point?

For the full Seeking Alpha article go to http://bit.ly/hcTx7 .



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