Since, in my opinion, technical levels explain the huge plunge that took the Dow Jones Industrial Average down 1,000 points or so (it’s not clear what real stock prices were during the heaviest trading since exchanges fell well behind on executing orders), let’s take a look at some of the technical levels that might explain the selling.
Yesterday’s (May 5) decline left the Dow Jones Industrial Average at 10868. That was just above the January 19 high at 10725. Technical analysts that I read overnight were saying that the market was getting to a crucial test of the January high but as long as the index closed above that level, investors were looking at a relatively minor correction in a trend that still pointed upwards.
But the gradual decline today, May 6, gradually took the index closer and closer to that key test at 10725. At 1:38 p.m. ET the Dow Industrials broke below the January 19 high and the selling began to accelerate. By 2:30 the index was down to 10596.
And then all hell broke loose.
Selling fed on selling and by 2:46 p.m.—that’s just a little over an hour after the index broke below the January 19 high of 10725—the Dow Industrials were down to 9873.
Last night technical analysts had been pointing to the February 8 low at 9908 as the next test below the January high. Well, the index did get slightly below the February low but 9873, just 35 points below the February 8 low, did mark the end of the free fall and the beginning of a rally that took the index back to a loss of just 390 point by a little after 3 p.m.
Technical markers taketh away and they giveth. At least for a few hours today.
I’d like to add: Robert Kaplan said something like “elimination of educated middle class (Jews in WWII and Saxons after the war) paved the way for Ceausescu” about Romania. I think the U.S. Capitalism was doing just that: the middle class slowly killed off by loss of jobs, lack of affordable healthcare and dismal state of education . . . we’ll see how a bit of “social medicine” could help.
Ed, I’m the last to defend socialism, but I think unrestrained capitalism is not much different. If the corporations are powerful enough, they can just kill you or enslave you. The big trusts and monopolies of the latter 19th century effectively enslaved many of the miners and workers in the lower class and killed those who tried to strike. Somehow, I think we’re headed for the worst of both worlds. Corporate power is increasing at the same time that government power is at a record high (in the US). I think that the lesson is that while we can win temporary gains against powerful interests, by striking out into new territory and establishing democratic government, eventually the most powerful players will find a way to entrench themselves. Socialism doesn’t seem to have demonstrated long-term stability any more than our system has, and it sure is distasteful to see people abandon personal responsibility and liberty for temporary security. It is inconceivable that the mass of people don’t feel guilt for sucking on the teat of the government and don’t feel the pride of self-determination.
The problem with socialism, especially a democracy-based socialism as is practiced in Europe, is if you go too far with it, there’s no “pulling a mulligan”. You’re stuck with whatever level of benefits your government has decided to give away, regardless of whether your country can afford it.
At least with a totalitarian socialism (see China), you can adjust the benefits to get it just right. Unfortunately, a few protestors will die in the process…
Which leads us to the question: Is central economic planning really a good idea? Granted, a complete laissez faire system can be every bit as ugly as a complete welfare state. But there comes a point between the two extremes where a government moves from policing the economy into running the economy.
The problem with governments running the economy is the same as the problem with laissez faire systems: Both are run by flawed people. The difference comes in the fact the government can use force to apply their mandates. If the government screws up, they can kill you for it. If a business screws up, they can’t drag you out of your bed and imprison you.
I’m with Christopher on “all governments merge into the same thing” . . . except for that, in capitalist systems like ours, we have “virtual money.” We all know how THAT turned out.
zak, North Korea is plain Dictatorship, though!
If its socialism like Norway or Sweden I don’t mind it. It’s much better than let my neighbor die or go bankrupt because a capitalist healthcare system.
But, North Kore- Noooooo
By the way when do you guys think is a good time to get back in?
Great posting guys! I am getting really tired of the “crony captitalism” and can’t stand the stinking fat pigs of Wall Street. Beside the PIGS of Europe, I got to think that there is some good with having some healthy dose of socialism like better countries of Europe.
Honestly, I don’t know ANYONE who was focused on the JANUARY high? what is that?
The difference between capitalism, socialism and communism are quite easy to define, but when you get enough people vying for a limited number of resources, and they employ big governments to administrate it all (which is always the case eventually), then all the governments start to merge into the same thing.
Uhm … Does anyone actually know the difference between capitalism, socialism and communism?
Anyway, that was a very fun day to watch. I have to admit that I was too greedy to make some quick megabucks, so I just sold some of the UltraShort positions, which I was holding for a while, making something out of this panic.
Today is a rare day: I agree with Ed on something to do with politics! Mostly, anyway.
There’s always a lot of debate in western democracies about how much socialism is the “right” amount, which has always seemed to me like an odd debate: there’s a whole bunch of actual democracies that practice a broad spectrum of economic philosophies ranging from borderline communism to, well, roughly what we have here in the US. You can pretty much see which ones work and how well they work. I’m gonna go out a limb and say that Greece’s version of socialism doesn’t work too well, and that Germany’s works much better. You certainly can’t lump them all together as if they’re the same thing.
Ed,
I want door number 3 too!
nukeage,
Why fear socialism? Indeed, a good question. I suppose the fact that all the PIIGS are socialist countries could be a valid reason to fear socialism.
Mind you, I am NOT defending our system, which is more “crony capitalism” than anything else. You only have to look at the number of Washington’s top-level bureaucrats with Wall Street roots to see who is pulling the strings, although a quick glance at the money from Wall Street firms certainly cements the deal. Let’s not forget the recent TARP and bailouts for Wall Street. Money talks, in politics too.
So if my choice is between crony capitalism and socialism, I’ll have to ask for what’s behind door number 3…
Red is the new green ; )
I’ll second that, nukeage. Man, I’m tired of hearing people running around wailing about how we’re all going to be dressing in red and calling each other comrade any day now, or whatever nonsense. The current administration is probably less socialist than Nixon’s or G.H.W Bush’s, for crying out loud. I mean, vote how you want, but maintaining fantasies so divorced from reality can’t be great for your portfolio.
Tom, why fear socialism? Western Europe — France & Germany for example — have practiced socialized capitalism successfully for decades. Everyone got rich and the poor had health insurance. Well, that’s an extremely broad stroke I used (and you may say what you want with the current Euro situation). Things were even better in Northern Europe. I think the U.S. media has indoctrinated its citizens to confuse socialism with Communism. Obama’s certainly no Stalin. In fact, I’d like some Wall Street types sent to Siberia but I guess it won’t happen.
I just read that the trader error was involved PG which I just sold about a week ago with good gain. What a nightmare!
What I wonder is if tomorrow they will wake up and buy into their mistake, and give us a big bounce, or just say oops and stick where they are.
I just heard on radio news that today’s deep plunging was due to trader error.
I dunno, a giant sell-off powered not by fundamentals but by technical markers and automated selling…sounds like a buying opportunity to me.
Hi Jim,
Thanks for the explanation. That was really scary, I thought we were falling off the cliff. This market seems really volatile now. I wonder if it is time to back of some positions.
So Jim, what do we do on TC and MXWL?
Jim, do you think capitalism is dead and we will be forced to embrace socialism? I feel that way sometimes, looking at where the current administration is heading.