Stock trading in the global circus

As mentioned before on doitinvest, DJIA looks like a yo-yo. The same for the oil price and for the profits of the companies today…

DJIA plunged again on a panic access to 8,600 points, after a big gain which was driving it just a few days ago up to 9,500. Looking at this yo-yo of trading a wild idea came to me – what if the news sources do not really get it and the causes of this stocks variations are not a result of the panic?

We can easily exemplify here. Let’s assume you are a small Warren Buffet or just a guy with all your savings in a shaky bank account and you want to put your money in some undervalued shares. But you cannot buy like a fool at once, since eating all the cookie can drive the shares price quite high. So you buy everything gradually. What would the result be?

Desperate investing funds want to sell as soon as possible huge amounts of stocks, no matter what losses they may incur. And the buyers – well they are buying gradually in order not to scare up the stocks prices. This trading behaviour on the US stock exchanges has not be seen until the last big bubble burst – the dot.com crisis in 2000-2001. But unlike then, we are talking now about much higher stoks trading volumes and about companies who have fundamental results much better that previously, but not marked by the stock exchange floor.

Of course, at a certain point in time the investment funds and the pension funds will sell all their assets and will have covered all their losses. In the US markets especially, I believe that these funds are very close (a few weeks?) to liquidating all of their positions. By then, the investment funds should have been covering all their losses and might be over with all this stuff, leaving the supply side of the shares trading much more balanced. But until then, the buyers are few and look for bargains, so it seems that their periodical interventions will continue to push the stock exchanges indexes pendulum up and down for a while…

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