Friday, June 21, 2013

Worst trading day of 2013 actually a good thing!

Yesterday marked the worst trading day of 2013. The Dow Jones Index lost more than 350 points (-2.34%), which erased all the gains from May and June. The last time the Dow shed off more than 300 points was in somewhere in November last year. There's panic in the market, thus a major sell off.

CNN Money's Fear & Greed Index Gauge lowest this year
Many financial news sites claim that it was Ben Bernanke from the Federal Reserve that caused this huge drop, after his announcement that the central bank might taper off quantitative easing later in the year. Now 'quantitative easing' is a way to stimulate the national economy when the normal monetary policy doesn't work. It does this by buying assets from banks and other financial institutions.

Seriously? And we wonder why this happened?

This implies to me that fundamentally the US economy is 'ballooned up' at the moment and thrives on capital injections from the government, since it doesn't have enough strength to maintain a sound fundamental economic base on its own.

The Dow Jones has had a bull run since November of last year, that's more than 6 months - adding well over a whopping 2,000 points... now all of a sudden everyone is panicking about the worst trading day of 2013?

Sooner or later this was bound to happen, and I think most traders and investors were waiting for a turning point in the markets. I don't know how many times I had to read: 'when is this bull market going to pop?', well: it just did. But despite the panic, even the VIX volatility index is now past 20 (which by the way is a healthier figure), I think this is merely a market correction.

Calm down.

Of course Ben Bernanke played a major role in this drop, but ultimately traders were waiting on some sort of news that would trigger a reversal, so theoretically: 350 points may seem like a lot, but I think it's great news because that means that the market is confident enough to survive on its own without the life support of the central bank, we would've seen a much - much sharper drop if this wasn't the case.

So, for me the worst trading day of 2013 is actually a good thing and is creating some money making opportunities along the way by a little more volatility. Once the market settles down and gets used to the fact that it may not need stimulus money anymore, we'll see an even bigger bull run. This may happen sooner than you think, I expect next week that the Dow Jones will be trading at the same levels at it did at the beginning of this week.

I solely base this on the fact that the Dow 'only' shed 350 points on the worst trading day of 2013. If the economy was fundamentally worse, it would've been much more after news like this from the Federal Reserve. To me, it seems like the most probable outcome, however on the flip side: if markets continue to (significantly) drop next week, it's a confirmation that the confidence in the overall economy is not as strong as I initially thought and a bear market (downtrend) may emerge.

Today the markets may still be a little wobbly though, getting used to this idea.

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