Remember the Flash Crash? We Sure Do

Seven years ago tomorrow marks the Flash Crash, a day no one will ever forget—at least no one in the LPL Research group. Although the exact reason it happened is still debated to this day, it began at 2:32pm ET and lasted for approximately 36 minutes. At the lows the S&P 500 Index was down 8.6% and the Dow Jones Industrial Average lost nearly 1,000 points, only to regain much of the losses before the final close. Additionally, many big name blue chip stocks lost as much as 20% at the lows, before recouping nearly all the losses by the close.

As this chart shows, the Flash Crash was the fifth-largest intraday percentage decline since 1987.

Ryan Detrick, Senior Market Strategist, “Why did the Flash Crash happen? Theories include fat-finger trades, high frequency traders, a single sell of 75,000 E-Mini S&P 500 contracts, and even a lone London-based trader using sell orders to push down prices for the sole purpose of repurchasing at a lower price. The bottom line is, seven years later and we still don’t know the exact reason it happened; all we know is it did happen!”

Something most people forget about from that day is the widely televised riots in Greece. Though the riots certainly didn’t cause the Flash Crash, the constant images did bring a sense of caution and a “one-foot-out the door” mentality that could have contributed to the sell-off late in the afternoon.

The big question we get is: Could it happen again? Although exchanges have taken measures to mitigate the chances, the truth is it could. With computers that utilize algorithms to conduct high-frequency trading strategies accounting for more and more of overall trading volume, it is always a possibility. What is important to remember though is what drives stock prices over the long-term are fundamentals, valuations, and technicals. Anything could happen one day, but those drivers are what truly matter in the long run.

Now let’s look at the recent action. Some have remarked how the lack of volatility is due to the huge increase of derivative premium selling strategies, high frequency trading, algorithms, or the enormous influx of new ETFs – whatever the reason, we’ll leave you with these remarkable stats:

  • In the past seven days, the S&P 500 has closed down 0.05%, up 0.06%, down 0.19%, up 0.17%, up 0.12%, down 0.13%, and up 0.06%. That is an incredible seven consecutive days it has closed within .20% of the previous day’s close, tying the all-time record from 1972 (using reliable intraday data since 1970).
  • In the past eight days the S&P 500 has closed within 0.5% of the all-time high, something that has only happened twice since 2000. Interestingly, the S&P 500 hasn’t made a new all-time high any of those days. In fact, it hasn’t made a new high for more than two months.
  • The S&P 500 has traded in a range of only 0.77% during the past seven days. Going back to 1970, only last July and January 1994 saw a range that tight.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Stock investing involves risk including loss of principal.

E-mini is an electronically traded futures contract on the Chicago Mercantile Exchange (CME) that represents a portion of the normal futures contracts. For example, the E-mini on the S&P 500 futures contract is one-fifth the size of the standard S&P 500 futures contract.

Derivatives employ sophisticated strategies that may amplify volatility and losses, involve additional risks, including interest rate risk, credit risk, the risk of improper valuation, and the risk of non-correlation to the relevant instruments they are designed to hedge or to closely track.

Investing in exchange-traded funds (ETF’s)) involve risk, including possible loss of principal.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Dow Jones Industrial Average (DIJA) is the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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