Don't look to the fundamentals--when stocks plunge this far, this fast it means big computerized selling has kicked in

05/06/2010 3:19 pm EST


Jim Jubak

Founder and Editor,

Wow! Or maybe better Yeeouch!

In the last hour the Dow Jones Industrial Average has been down 1000s points as it fell and kept on falling. Or just 390 points down as it rallied off the bottom.

I don’t know exactly where the index is right now because I’ve taken a 15-minute break from obsessively watching the ticker to write this.

My best guess on what’s happening is that the selling of the last two days and the first part of today finally took prices on the major indexes low enough to trigger massive program trading.

In other words, as happened in 1987, computer programs designed to protect investors from massive losses by selling when prices got too low went into action and in selling created exactly the losses they were designed to prevent.

I’m using program trading here in the loosest sense for computerized trading programs designed to kick in at preset market conditions. I don’t know—and we won’t know until someone takes apart the numbers after the close today—whether the selling was triggered by the price of the actual indexes or by prices in the futures or options market.

As you’d expect on a day like today gold has rallied—back above $1200 an ounce—and safe-haven buying has taken prices of U.S. Treasuries up and the yield on the 10-year note down to 3.33%, the lowest since December 2009.
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