Flash Crash of 2010

The big news of the week is the “flash crash” that occurred Thursday between 2:40 and 3:00. There have been a number of rumors as to what the cause actually was from a fat finger of billion rather than million to computerized High Frequency Trading (HFT) programs. Of course Congress is demanding to know caused it. The official word is that there were no erroneous trades of that size, though it doesn’t mean it didn’t happen though I doubt it. I’m not saying that HFT didn’t impact it.

There are a lot more trading programs out there that run large numbers of trades in the time it takes us to think about the symbol to pull up a quote. But does that make it bad? It also has contributed to some of the volatility. But does that make it inherently bad? Has not the ability to place trades from out Blackberry or iPhone increased the speed with which you and I can place trades? This would also increase volatility but is it bad?

I heard a ten-minute recording of the floor of the S&P 500 futures pit. The S&P 500 futures are some of the most liquid securities out there and normally trade with a $0.10 bid/offer spread. During that time they had a $10.00 bid/offer spread or 100 times normal. What this boils down to is that there were a whole lot more people selling than there were buying. This is indicative of the fear that is still out there.

I have said we are 10 years into a secular bear market. These historically have run for about 16 years so we still have some time for it to run its course. This doesn’t mean we won’t have bull runs but you need to be cognizant of the environment.

Consider: It’s probably hard to want to consider an investment in the stock market right now but we do see domestic equities as a favored area of the market at this point. One ETF to consider is the Vanguard Extended Market VPER (VXF). This ETF covers small and mid cap stocks which are two strong areas of the domestic equity group. Short term support would be around 42 and below 37 we would be a seller. Good upside with a 54 target.

Avoid: iShares Europe 350 (IEV). IEV covers large the large cap European market. The European Union of course has been all over the news lately with troubles in Greece. But Greece is only the beginning of the problem countries known affectionately as the PIIGS: Portugal, Ireland, Italy, Greece and Spain. IEV broke its long-term support this week and is not clearly in a negative trend.