What a Financial Panic Might Look Like

Stocks ended the week looking tired, but we’ve learned over the course of this bull market, now in its ninth year, that no matter how fatigued  buyers might seem on a given day, there will always be short-covering bears to rescue them in their hour of need. In statistical fact, a steep, day-long sell-off has all but guaranteed a short-covering panic whenever the selling has continued into a second day. The squeeze is easily triggered by DaBoyz, who simply pull their bids overnight so that stocks can fall far enough to exhaust sellers. They don’t have to buy much stock on the way down as they ratchet their bids lower, and that’s why being downhill of an avalanche holds relatively little risk for them. One might get the impression that this rigged game could continue more or less forever. It won’t, though. At some point the Masters of the Universe will fade sellers on a day when there are vast legions more of them waiting in the wings to dump stock. The algos will sniff this out in an instant, and their response will turn an avalanche into something that will feel, at least for a few hours, like Armageddon. The exchanges will throw their circuit breakers, but that won’t help if the panic has spread to the streets. The Fed has circuit breakers of its own, but the bankers face Catch-22 jeopardy using them, since shutting down the banks even for a day, if unexpected, will have the opposite effect of calming the herd. Depositors will need a shoebox full of $1s, $5s, $10s, $20s, $50s and $100s when that day comes, since ‘plastic’ will buy nothing and bullion will have no clear value, at least initially.