The Euro Pulled the Trigger

05/06/2010 4:56 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Maybe technical levels of stock indexes did turn a bad day for stocks into a heart-in-your-mouth plunge, but stock prices aren’t the only thing that might have triggered today’s 700-point drop in the Dow Jones Industrial Average from 2:30 to 2:46 pm ET.

There’s a good chance that the plunging euro played a part. The euro was down 1.5% against the dollar by 3:00 PM (roughly). That’s a drop of a full two cents and a bit more. That’s a big move, since this market usually marks its gains and losses in the hundredths of a cent.

The euro’s plunge against the yen was even bigger, a huge 5.3% drop.

A 5% move in the currency market is almost a sure sign that somebody big has started to unwind—probably in a hurry—a big, big bet on the direction of currencies, and that other big players have followed suit.

One possibility that comes to mind is that someone was betting on the direction of the euro and using stocks or yen to hedge the risk. And when the euro went down to $1.2612 today, that someone decided to unwind that hedge. And the unwinding of that hedge set the panic in motion.

A few minutes ago, CNBC reported a trading floor rumor that the drop was a result of someone entering a trade in billions instead of millions. Could be.

But while the error may have started the ball rolling, it wouldn’t have turned into an avalanche without lots and lots of money blindly following price moves rather than paying attention to anything fundamental in the market.

If you think of stocks as interchangeable lottery tickets—and much of Wall Street does—this is the kind of trading day that results.

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