Dow Suffers Surreal Drop, Ends Down 350

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The stock market sent shock waves through the world economy on Wednesday, falling nearly 1000 points in the early afternoon in a spastic move that was partly reversed within an hour or so of the initial drop. Most startling, seven hundred  points of the drop happened in just 15 minutes, leading many to conclude that high frequency trading was behind the selling. More than 2 billion shares traded by the time the market closed at about 10,518, down 350 points.

The shock of the Dow’s drop was only outdone by some single stock horror stories. CNBC reported that Accenture shares went from $40 to one cent before bouncing back. Proctor & Gamble went $60 to $40 on the NASDAQ, but not on  the NYSE where it never got below $56 due to speed bumps that prevent such free falls.

As the afternoon wore on, talk increased of a possible technical glitch or trader error as the thing that sparked the selloff, possibilities that will be fully investigated. However, what is of far greater concern is the widespread fear that is enveloping the world.  The European crisis is certainly the epicenter of this latest round of investor panic, and the EU leadership’s loss of credibility over its handling of the Greek crisis is only making matters worse.  But this isn’t just Europe; it is an over leveraged world going through a painful withdrawal that began several years ago. It’s what hedge fund manager Ray Dalio dubbed the D-Process, where the D refers to Deleveraging, Defaults and all the other unpleasantries that characterize debt withdrawal.

With confidence shaken, this is not likely a point of bargain hunting. It will likely lead to more risk aversion (possibly even acute risk aversion,) higher risk premiums on securities and more challenges for central bankers. The truly interesting question now is where will fearful investors go, as nearly any security or commodity is vulnerable in some way. Wherever you are, prepare for bumps ahead.

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