Raw Finance

Stock markets worldwide are in “free-fall” as I write this.  U.S. stock market futures are “down the limit.”  Futures trades, basically bets on where the markets will finish on the day, have fallen to their maximum limits and all such trading has been suspended as a result.

There are also trading halts that may kick in today during regular trading.  These halts are put in place when the market drops 10, 20, and 30 percent.  However, the percentage drops are calculated at the beginning of every quarter, which means that for today, the halts will begin if the Dow Jones Industrial Average drops 1,100, 2,200, or 3,350 points (at the beginning of the quarter, the Dow was around 11,000).

If the Dow drops 1,100 before 2 p.m. (ET), then the market will halt for an hour; between 2 and 2:30 p.m., the stoppage will be 30 minutes.  There is no halt to trading if the 1,100-point level is breached after 2:30.

After the initial halt, if the Dow then drops 2,200 points before 1 p.m., the market will pause for 2 hours; after 1 p.m., but before 2 p.m., the stoppage is for 1 hour.  If this level is reached after 2 p.m., the market would close for the day.

Finally, if the Dow drops 3,350 at any time during the trading day, the market will close for the day.

UPDATE [5:30 p.m., October 23, 2008]:  What looked to be The Day, that one cathartic sell-off that every trader looks for as the bottom of a bear market, turned out to be just another 3-percent down day, in a series of such days.  The overall trend to this market is down, and it will remain down (with some up days in between) until there is some coalescence of economic news that offers some basis for calculating a reasonable path for the economy.

Everyone knows that profits next quarter are going to be bad, but there is a lack of vision as to how bad because few companies want to offer a hard forecast.  Instead, as I have pointed out earlier, the word “challenging” has dotted every written statement following companies’ earnings reports.  To the markets challenging equals uncertainty, and there is nothing equities markets disdain more than uncertainty.  Uncertainty leads to days and weeks like we have had, because the market prefers to undervalue companies until the evidence is in.  This kind of rampant selling leads to margin calls, forcing hedge funds and others to sell their holdings to meet these calls.  Then, as investors get nervous and pull their investments from various funds, these funds are forced to sell to raise cash to pay back the exiting investors.  One can see why a giant whirlpool of selling can form and pull everything down with it.

Next week will probably offer more of the same.  On Tuesday and Wednesday, the Federal Open Market Committee will meet to determine what to do with interest rates.  Most analysts expect a .5 to 1 percent reduction in the overnight lending rate.  The Fed cuts rates in an effort to spur economic activity by making lending between banks cheaper, banks then pass these savings on to borrowers.  The markets already expect some kind of cutting action from the Fed, so it is difficult to say whether this will have much of an effect.

David Reilly at The Wall Street Journal explores reasons why the continued downtrend in the market is not over.  It is worth reviewing to understand that, despite the drop in the markets thus far, stocks are not necessarily cheap, and any rally should be viewed skeptically.  A link to the article is here.