Lessons From A Flash Crash

The last time the stock market flash crashed, I was way over extended with my call options.  I was not paying attention or did not have sufficient alerts set up.  Like many, I was riding the wave of complacency.  The market was in an uptrend and despite minor warning signs, like low volatility, investor over-confidence, and many extended stocks, I was enjoying the relaxing ride.

I lost a ton of money in one day.

This time, with the market in yet another uptrend and a rising peak tide of good sentiment, low volatility, I was mostly in cash.  I had very limited long positions with tight trailing stops and only one call option in play (NVDA}.  Purely a hype play and I sold both call options shortly after the open Friday morning for nearly a 300% gain.

My stops took care of the rest.

I made a nice little profit and managed to protect most of it too.

IBD had a very interesting and timely article regarding the VIX, you can read about it here.

Basically the VIX was at all-time lows and despite a less than favorable UK vote and the ever depressing saga of Trumpolitics, there seemed to be little to no fear in the markets.

That was when it happened.

The VIX  “flashed” an extremely bullish signal (hitting historic lows) shortly before the selloff began.

By the time it was all over the market was down a lot!  It seemed everything lost value Friday.  But then I started looking at some of my watch lists and reading daily recaps and low and behold, the financial sector was up.

With republicans pushing through the repeal of Dodd-Frank and the up-coming Fed meeting where analysts believe rates will go up, Is the tide shifting?

Again, some other timely recap articles mentioned that the financials were bucking the trend and actually showing signs of recovery.  But much of their gains were on low volume.  Other articles talked about how during a correction, certain stocks and certain sectors will hold up better than others.  When the market does recover, and start another uptrend, the new leaders of the rally are rarely the same as the old leaders.

Selected stocks from the sectors which hold up better than the rest during a correction are more likely to be the new leaders.

So the questions are . . .

Is today the beginning of the end for the bull market and the start of the bear?

Or, is it yet another flash crash to bring the high flying market back down to support trend lines?  After all, we have had three of these within the past six months and each time the market recovers.

At least 3 flash crashes in the past 6 months

It certainly looks like a ton of money left the market Friday.  Just look at the formally high flying tech sector.  Interestingly, visually it looks like each crash is progressively more dramatic with more volume.  IF the money left the high flying tech sector, where did it go?

During a correction or consolidation, money basically goes one of three places.

  1. Cash.
  2. Defensive Stocks (like gold or consumer goods, food products and tobacco).
  3. New Sectors.

So to try and answer this I took a look at some screeners.  One is FINVIZ top gainers.  Believe it or not, there were 153 stocks earning over 5% Friday.  That is a lot for such a bad day on the street.

Here is how the 153 broke down sector wise.

Sector Industry Sub-Total
Basic Materials Independent Oil & Gas 20
Basic Materials Oil & Gas Equipment & Services 12
Basic Materials Oil & Gas Drilling & Exploration 6
Basic Materials Oil & Gas Refining & Marketing 4
Basic Materials Gold 1
Basic Materials Industrial Metals & Minerals 1
Basic Materials Major Integrated Oil & Gas 1
Basic Materials Nonmetallic Mineral Mining 1
Basic Materials Oil & Gas Pipelines 1
Basic Materials Steel & Iron 1
48
Consumer Goods Personal Products 3
Consumer Goods Sporting Goods 2
Consumer Goods Textile – Apparel Clothing 2
Consumer Goods Beverages – Soft Drinks 1
Consumer Goods Cleaning Products 1
Consumer Goods Electronic Equipment 1
Consumer Goods Home Furnishings & Fixtures 1
Consumer Goods Textile – Apparel Footwear & Accessories 1
12
Financial Regional – Mid-Atlantic Banks 7
Financial Money Center Banks 2
Financial Regional – Midwest Banks 2
Financial Regional – Northeast Banks 2
Financial Savings & Loans 2
Financial Asset Management 1
Financial Credit Services 1
Financial Investment Brokerage – National 1
Financial Regional – Pacific Banks 1
Financial Regional – Southeast Banks 1
Financial REIT – Diversified 1
Financial REIT – Hotel/Motel 1
Financial REIT – Office 1
23
Healthcare Biotechnology 12
Healthcare Medical Appliances & Equipment 4
Healthcare Medical Instruments & Supplies 3
Healthcare Medical Laboratories & Research 3
Healthcare Drug Delivery 1
23
Industrial Goods Heavy Construction 4
Industrial Goods Industrial Electrical Equipment 2
Industrial Goods General Building Materials 1
7
Services Shipping 8
Services Apparel Stores 6
Services Specialty Retail, Other 5
Services Department Stores 3
Services Home Furnishing Stores 2
Services Air Services, Other 1
Services Business Services 1
Services Education & Training Services 1
Services Gaming Activities 1
Services Publishing – Books 1
Services Restaurants 1
Services Security & Protection Services 1
31
Technology Communication Equipment 2
Technology Semiconductor – Integrated Circuits 2
Technology Application Software 1
Technology Diversified Communication Services 1
Technology Networking & Communication Devices 1
Technology Wireless Communications 1
8
Utilities Diversified Utilities 1
Total                            153

 

Of course, one day does not a trend or correction make but it might be interesting to keep an eye on what the market does, and if it does correct, which sectors hold up better than the rest.

Will it be Basic Materials?  Financials?  Healthcare? Or some yet to be determined sector?

What do you think?

Flash crash, beginning of the end, or market rotation?

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One thought on “Lessons From A Flash Crash

  1. Thx for the analysis. It is indeed important to have a watch list to keep on the outlook for trading opportunity.
    I also like the analysis that often Hen the overall market is down, there could be still rising stock.

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