We expect to see the finger pointing continue as to the reasons for the market’s worst sell-off since the Lehman Brothers days, and at this hour speculation has centered around a trading error at Citi (C).  Citi has denied the claims, although they are investigating.  The NYSE says there were no erroneous trades of Procter & Gamble (PG) or any other shares. Now, is it possible that a “fat-fingered” trader accidentally pushed “B” for billions instead of “M” for millions and dropped the Dow by as much as 1000 points at one time?  Sure its possible, but we think that what is more interesting is the market’s rapid reaction.

At our office this afternoon, we huddled around our computers hitting the refresh button and calling out the worsening loses for what seemed like a long time but only lasted a few minutes.  It’s down 410…550…700…920!  The market was in full-blown panic-mode.  I am sure this sort of activity happened in many offices this afternoon, and we all looked at each other looking for answers.  Was it the Euro, Greece, Spain, housing, banks, what were we missing?china_shanghai_stock_market_crash_recession.jpg

In short, we came to the conclusion that this has been a long time coming.  Market participants had become complacent in the preceding months and being bullish was no only en vogue it was expected.  With that said, the stock market has been built upon a vulnerable foundation.  Around here we got the sense that that last few months were built upon popsicle sticks, a strong wind could send it tumbling.  Make no mistake, the market was oversold in March of last year, but 14-months without so much as a ten percent pull-back?  That is simply not sustainable, even if earnings are recovering and handily beating expectations.  We had been expecting a pull back for a month or more now, but we didn’t expect it to take place all in one day!

The market’s behavior today seems to make our case for us.  The Dow dropped 300 points and believing the rally was finally ending investors rushed to the exits hoping to hang onto as much profit as possible.  Trading algorithms with tight stop losses triggered and human beings caved to their own emotions.  No one knows when a catalyst will take place, be it a trading error or not, but Mr. Market displayed fear for the first time in a long time today. 

Of course, the market did recover somewhat from the huge losses earlier this afternoon.  But you can bet that complacency with the perpetually rising market will not be the case any longer.  This was a wake up call that valuations are simply too hot.  We still expect a further correction or at least a slight pause before a buying opportunity presents itself.

Errant Trade Gives the Market an Excuse to Drop