Thu, Apr 25, 2013

Twitter Causes A Flash Crash

How strong is your confidence in the ability of financial markets to weather a downturn?

If you’re like most other investors, you don’t have too much confidence at this point.

Fears over a market crash are still high. The VIX Index (a.k.a the “Fear Index”) trades at twice the level it was when markets were this high in 2007.

The cash balance in brokerage accounts is at near record levels.

And nearly every investor survey says investors are still apprehensive about investing in stocks. A Bankrate.com investor and saver survey found, “76% of people are not more inclined to invest in equities because of rock-bottom rates on bank savings accounts and certificates of deposit.”

In short, investors are waiting for a crash to come. And yesterday, after the Associated Press Twitter account was hacked and told the world falsely of an explosion at the White House and President Obama was injured sent the markets plummeting.

Within minutes of the tweet the S&P 500 shed one percent of its value on billions of dollars of trading volume:

This is the clearest indicator yet of the precarious position stocks are in right now.

The market rally is overextended. But with few other investment options, the big money is still buying. However, they’re always keeping their eye towards the exits.

That makes risk of a significant short-term correction very high.

But the thing is the risks of a Real Crash On Stocks are still very low.

Throughout financial history, the Major Market Crashes always came at times when investor confidence was high. They come unexpectedly too.

Right now confidence is low and most investors are expecting the worst.

It’s like the old Wall Street saying goes: when everybody’s in, the pain will begin.

Right now it’s clear everybody is not in…yet. It’ll be time to worry and prepare for the worst when they are in.

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Good investing,

Andrew Mickey

Executive Editor, Contrarian Insights