Wednesday, February 27, 2013

Great Stock Market Crashes: Black Monday In 1987

Great Stock Market Crashes: Black Monday In 1987: In early 1987, there was a rash of SEC investigations into insider trading. For the most part, people were aware of the tendency of Wall Street to look out for itself, but the barrage of SEC investigations, rattled investors. By October, investors decided to move out of the crooked game and into the more stable environment offered by bonds or, in some cases, junk bonds.

As people began the mass exodus out of the market, the computer programs began to kick in. The programs put a stop loss on stocks and sent a sell order to DOT (designated order turnaround), the NYSE computer system. The instantaneous transmission of so many sell orders overwhelmed the printers for DOT and caused the whole market system to lag, leaving investors on every level (institutional to individual) effectively blind.

An Iv-B market can become increasingly deceptive so eventually an I-O crackdown makes investors realize how shaky the economy is. It's like shoddy buildings having tenants until building inspectors scare people into moving out. When the market is built on leverage this can cause ceilings and floors,  for example the need for more capital stopped the growth of the US real estate market prior to the GFC so it reached a ceiling. Then the momentum of people buying crashed into this ceiling of no easy finance so prices started to crumble. Then as they fall people can no longer sell their homes and start defaulting causing more credit contraction, to avoid this people sell early increasing the free fall of prices until they smash against the floor of what is considered to be a low enough price. This is like Iv-B weeds growing, they strain to grow faster than others to get to the light before being overshadowed. If resources are scarce then they are starving as they grow until they start to collapse, then they try to divest themselves of unused branches and leaves to survive like people selling investments to stay solvent overall. it is also like in the Roy animal kingdom where Oy hyenas might overeat R gazelles by using the leverage of high spped chasing to catch more than this energy investment in flesh eaten. Then they have more offspring until this leverage causes hyenas to be starving, then some start dying while a core of the fastest ones survive as the R prey are decimated. Then the Oy numbers reach a floor where the R prey left can support them but the momentum of this drop causes another crash, they must change their survival habits to start having offspring again or those that do will have a greater share of the population as the R numbers grow again.

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