Black Thursday, May the 6th 2010 - What Happened?

First of all, let me tell you how historical this was. I was in the train, commuting back home. Before leaving the office I checked Bloomberg: markets down nicely, about 2%. Then, 30min later, I check Bloomberg on my iPhone, and I see Dow down 1,000 points!!! I thought this must be wrong but my heart beat accelerated quite substantially. Trying to reload the data from Bloomberg was failing. I think Bloomberg servers were overloaded by requests. This confirmed me that it was real...

Nonetheless, I wanted to cool off before writing about it, that's why I didn't post yesterday.

So, here's the truth about what happened: nobody knows! One thing is for sure though: rationalization is going like crazy. This is one of principles of good market understanding: first something happens, then media tries to find the reason. Here are a few examples:

• Athens mayhem hits Tokyo markets
• High Frequency Trading, and evil computers on Wall Street, tried to spoil the party to Dow 36,000
• Fear of credit issues spreading from Greece to the rest of the world created a panic

Any rational behind this? NO.

Did anything happened to create such a panic in such a short period of time? NO.

I believe what happened was just an air pocket: when there's no more buyers because exuberance has reach such extremes, the slightest decline can turn into a big break down. 

Mike, from SovereignSpeculator has written a fantastic post about this air pockets, so I won't put more efforts into describing them, so please, read for yourself his post.

But what you should have known, and you have been warned no later than Monday about this issue, is that major air pockets are coming. But the most important thing you should take away from this event is the following:

EVERYBODY is still bullish, greed remains extreme and has not been balanced by fear at all from yesterday mini-krach. Nobody believes in the market's warning. Yesterday was just an anomaly, and aberration, that you should profit from, they say.

Unfortunately, this kind of rationalization and dismissal is not a contrarian move. It means that it's all but a contrarian move to remain long in this market. It doesn't mean you'll lose money on the short term (next few sessions), but the odds are that you will, and big will be your losses.

Reactions from Marc Faber and Jim Rogers, made on the same day, were a proof that experience and wisdom is shared only by a few.

Marc Faber, on Bloomberg:

I don't think Greece is the cause of the sell off. I believe its a catalyst but the cause of the sell off is that markets run up too much, too quickly. In other words, most emerging markets were up more then 100% from the March lows and the S&P 500 was up more then 80%, and as I have argued we would see a 20% to 30% correction this year. Anyway, it just happened that this 20% correction happened in 10 days.

Jim Rogers, on Bloomberg:

It was time for a sell-off, and we had it.
Today was not a panic, it was a normal correction. The markets are overdue.

I'll finish by quoting Mike's previous post:

Few have been converted to the bear camp, with the general consensus being that yesterday was a technical aberation. It should serve as a warning about how ephemeral equity prices can be, and how buyers can just disappear in a panic when there is no fundamental support for thousands of Dow points under the market.