May Market Crash! No, wait.... Nevermind!

Today was one of the craziest days on the market. The DOW had it's biggest intra-day point drop ever, falling over 1,000 points from 10,800 to just under 10,000 -- over 9%. 9% for an index! Then as quickly as it dropped, it jumped up, closing down only 3% by the end of the day. Here's what the day looked like:

But that wasn't the weirdest part. Accenture, a $40 stock, within a few minutes ended up trading at 4 cents, 1 cent, and then immediately right back up to $40. Here's the full day picture:

And here's the close-up of a single 1 minute timespan at the craziest moment (click the image for a larger version):

Remember, the chart above spans just 1 minute! There were a couple of times when there would be a trade at $30-ish or so, and then the very next trade would occur at 1 cent, and the next trade back at $30-ish. But it wasn't just one single oddball trade caused by some glitch. You can see that there were hundreds of trades (over 400, actually) in this 1 minute that gradually brought the stock price to its knees.

A few other stocks supposedly traded down at the 1 cent level as well. Also, Procter & Gamble, an extremely stable stock, briefly dropped from $60 to just below $40, before immediately returning to $60.

So What Happened?

Markets were already spooked with the riots in Greece today and the whole Greek Debt Crisis. Original sources were trying to place the blame of the market crash on a "fat finger" -- someone accidentally entering a billion-dollar order instead of a million-dollar one, which then supposedly set off a wave of automated selling. But a lot of people are saying that the markets had already dropped a lot before any supposed erroneous trades or price quotes occurred, and the drop was led by large moves in the currency markets.

A summary article:

http://www.reuters.com/article/idUSTRE6455ZG20100506

Here is one article that places the blame on automated high-frequency trading:

http://www.zerohedge.com/article/day-market-almost-died-courtesy-high-frequency-trading

I think it will take a few days for people to fully analyze the situation and for us to get some good, interesting articles on what happened today. I personally think that this is something that could happen any time due to the highly-automated world of trading we now live in, and it's quite scary. The Accenture graph above shows what strange things can happen when only the computers are in control.

I think this quote sums up everything the best:

"We did not know what a stock was worth today, and that is a serious problem," -- Joe Saluzzi of Themis Trading.

Recession Confirmed

Market crash again today. Glad I got out of SSO and UYG! Apparently it was the biggest one-day point drop in the TSX since crash of '87. Like that even means anything any more. I think the media can stop giving stats like "the biggest x day point/percentage drop since xyz." Every day it's some new record; the volatility is just crazy. So just stop it with the stats unless it's something really major.

I was wanting to switch over to SKF (2x short financials, basically the opposite of UYG), but was waiting for it to go below $130. It didn't quite make it, and it shot up 30% today -- gah! Missed out again. There's so much opportunity to play these market swings, it's just impossible to time the peaks and valleys.

Oh, and the big news today was that yes, the U.S. is in a recession and it officially started in December of 2007. Well, no duh. I think it's so stupid that it took a whole year to "confirm" the recession. But I guess everyone's definition of the term recession is different anyway. According to the most commonly used rule of thumb, you have to have 2 consecutive quarters of negative GDP growth to be in a recession, which has not happened yet. Obviously that is not a very reliable indicator. I hated how the question in the news throughout 2008 was always "Do you think we're in a recession?" Why wasn't every single economist jumping up and down saying, "Yep, it sure looks like it!" No, no-one would ever admit it. You can never be negative... wouldn't want to spook investors and have the markets drop or something.

Of course Mr. Eric Sprott was right as usual, saying back in January and February of 2008 that it looked like the recession had finally begun. It's always interesting to go back to Sprott's Markets at a Glance articles from late 2007 and early 2008 to see how accurately they predicted the whole mess that is now happening.

I'm obviously more bearish on the markets than bullish, but I keep feeling I'm missing out on the short opportunities and then I end up going long when I think there might be a temporary bottom. And I could see myself trying to grab a short-term bounce again soon, buying back into UYG if it hits the $3.xx range over the next week. We'll see...

Ouch!

Ouch! The market plummeted again today. S&P down almost 7%. UYG down 19%. I should've known not to try to catch a falling knife. Oh well.

And Oil finally went below $50. I should've stuck to my plan to wait until oil went this low before buying more DXO, but even when blogging about it I couldn't force myself to stick to the plan.

I'm sure tomorrow will be interesting.

Freaky Friday

Well today was interesting. I woke up early only to find that the overseas markets had plummeted again, oil dropped from $68 to $63 after OPECs decision to cut 1.5 million barrels per day -- about the expected amount (so I guess it was buy on rumour sell on news... bah!) -- and Pre-market futures had dropped so low they hit their max limit for the day (-550 points for the DOW), and of course another load of bad news was released. People were panicking and there was speculation of the DOW opening down 1000 points and how it was going to be complete anarchy. It turned out to be not so bad, considering the oversees market performance and dismal news, and the DOW ended down only (yes, "only") 300 points.

On open, Energy stocks were down the most at about -10%, meaning DIG opened about -20% in the $23-$24 range. The markets didn't open as low as everyone expected and started rising. I was a little freaked out of course (I shouldn't have woken up early to see the news) and I had my finger on the trigger to sell. As I saw the market rising a bit, I was considering just trying to get out of DIG at a small loss around $26, especially when it finally hit that. I was nervous about the market tanking mid-day.

But then I imagined I wasn't invested in anything right now and thought about what I would be doing in that scenario. And I realized I would probably be wanting to buy DIG immediately while it was low, and I wouldn't be that nervous about it. After all, oil was down to $63 now, the markets were way down and starting to rise, and it was at the same price I had previously purchased it at when everything was higher. I realized that I quite commonly tend to freak out when I've bought something that goes up and then comes back down to the price I bought it at, even if I would be happily buying it again if I had never bought it.

So I decided to hold on. DIG rose quite a bit (thanks to Exxon Mobil doing a little better than the average energy stock) and finished -8% today at 27.56, above my average purchase price.

Gold also hit a low of around $680 and then shot up to $740, ending up in the 730's. I really think $680 is the bottom for gold. I'm hoping that with it so low and people finally being spooked enough with the continued selloff of the markets and bleak outlook, they'll finally start to flock to gold again. I don't think the rise in the US dollar will last much longer, and then gold should shoot up to the $800's.

Eggs: meet Basket

So where was I... Sprott Canadian Equity Fund (SCEF) was making me incredible returns from 2003-2007. I had also diversified into their Precious Metals/Gold fund and Energy fund, which really wasn't diversifying because SCEF had basically had become equivalent to half of their Precious Metals fund and half of their Energy fund. In fact, I believe SCEF now has to be classified as a precious metals fund due to the amount of gold bullion and precious metals content.

Anyway, in late 2006 I was continually reading articles from Sprott and other trusted sources predicting the upcoming U.S. housing market crash, possible financial meltdown, and almost guaranteed U.S. recession (all of which came true). Sprott and others were going on and on about how gold and silver were the only safe havens, and how gold, then at $600, would soon skyrocket over $1000. I decided it was time to take another plunge to hopefully protect myself and make a killing in the process. So in early 2007, I borrowed a whole shwack of money again and invested it all in the Precious Metals fund.

So now I pretty much had everything in gold and energy. While all my eggs were pretty much in one basket, I couldn't see anything else worthwhile to invest in; diversification wasn't an option. But I also didn't want to sit on the sidelines in cash. And I was somewhat correct as it turns out, there weren't really any good investments the last year (as far as "long" positions go).

I was unprepared for what happened next. Gold did move according to plan: in one year the price of gold went from $600 to $900 (and at one point over $1000). However, gold stocks went down about 10%. I couldn't believe it. But that was just the tip of the iceberg. They gradually went down more, and then the whole recent subprime/financial crisis hit. So I thought, "good, my gold stocks will pay off now". But as the financial stocks started plummeting, eventually the whole market and world markets crashed 20-40% at the beginning of October. The gold stocks that I thought would save me came down even harder, and energy stocks even worse than gold. I thought I was prepared for this, thought I was protected. Looking back, I feel pretty stupid for underestimating what a market crash can do. SCEF is down about 40% YTD, and the precious metals fund is down about 50% YTD. I've lost a lot of eggs -- on paper.

Now, I don't blame Sprott at all. Their overall call was correct. In fact, Eric Sprott has always been so bearish that he's never recommended anyone investing in his long-only mutual funds! Seriously! Even though his mutual funds had performed better than his hedge funds to date, he always recommended the hedge funds, which could hold short positions, which he felt was needed to add protection in this secular bear market (and lo and behold I believe the hedge funds are anywhere from only -10% to break-even YTD). I knew that Sprott was short on all the financial stocks. If I truly believed what they were saying, I should've had some short positions. I didn't want to get into shorting or buying put options though, so never gave it a second thought. If I would have done my research though, I would have discovered that there are great inverse ETF products out there -- leveraged ones too (e.g. SKF or SDS), which basically allow you to short various indices without actually shorting. I already had plenty gold; I shouldn't have bought more. I just didn't see the other angle that I could attack from. Oh well, lesson learned, and now I know about all these great ETFs out there.

I still trust my holdings in Sprott -- they've had big losses before and have recovered. They know what they're doing, and their responses in conference calls to the recent horrible performance have been very re-assuring and encouraging. I do believe gold is poised to skyrocket again and that gold stocks shouldn't go much lower, so there's no point in selling now near a bottom.

With the markets having dropped so much and everything getting so crazy volatile (record one-day gains and losses in the DOW being broken every week), I felt there was a lot of opportunity out there that I didn't want to miss out on. Mutual funds are not nimble enough to be able to fully participate in some of the short-term opportunities. So the itch to begin some stock trading set in...