Only one nice trading session is needed for S&P 500 and DJI to hit this level and if it is broken it could mean that we may see further move up. However, I consider that the odds of the bounce down again are still good. Research at the Massachusetts Institute of Technology shows that there is evidence that the frequency of stock market crashes follow an inverse cubic power law.24 This and other studies suggest that stock market crashes are a sign of self-organized criticality in financial markets.
As a result, most attendees’ eyes glazed over as I dove into market dynamics and current market trends. Another kind of decline in stock prices is a bear market – this occurs when there is a steady decline in the stock prices over a few months – and sometimes even years. The Crash was the greatest single-day loss that Wall Street had ever suffered in continuous trading up to that point. That is when people dream up sterile mergers and acquisitions, investment trusts, junk bonds, stock futures, index arbitrage, anything that can keep apparent wealth swelling though real wealth is stagnant. What they were really concerned about wasn’t how I am managing the coming crash within a particular service, but how they, and others, could avoid a crash like we saw in 2008 when it happens again.
The short sellers smell blood when they saw that the market was crashing and they made out like bandits, but the effect that they had on the stock market is that they caused the prices of individual stocks to go down so fast and so hard that investors did not have a chance to sell their stock to get out of the market, because the market makers know that the stocks were going to go down and refuse to execute there buy orders.
One of the biggest problems during the boom time of the stock market is that brokers were so confident that stocks were going to keep going up that they were allowing investors to buy stock on margin. Sooner or later the investor that left the market in the result of the recent crash will come back and start to inject funds into the stocks. For example, many cite the September 1929 passage of the Smoot-Hawley Tariff Act, which placed high taxes on many imported items, as a major contributor to the market’s instability. After the crash the New York Stock Exchange then implemented rules to limit the amount that a broker can lend to an investor on margin.
By Friday, the situation was so out of control that the decision was made to close down the stock market. Eventually dreams and reality have to be reconciled, and that means some kind of crash. Though the market ended on a positive note on Thursday, there was still some panic among the people. The value of the shares is strengthened further by stock splits and as icing on the cake this value of the shares was enlarged again in the Dow Jones Index, because behind the scenes the formula of the Dow Jones was adjusted due to stock splits.