Trading Stock Market (3)

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. When this was inevitably followed by a 12.8% drop in the Dow Jones Industrial Average, the stock market indices created by the editor of the Wall Street Journal, people started madly selling their stock, jamming phone lines and other communication systems.

The short sellers smell blood when they saw that the market was crashing and they made out like bandits, but the effect that they had on the stock market is that they caused the prices of individual stocks to go down so fast and so hard that investors did not have a chance to sell their stock to get out of the market, because the market makers know that the stocks were going to go down and refuse to execute there buy orders.Stock Market Crash

The investor class, banks and government then conspired to rally the markets by pumping lots and lots of money into it, and eventually by mid 1930, it hit a ‘dead cat bounce’ peak of 294, quickly pushing up another 90% to get it to early 1929 levels.Stock Market Crash

This high volume tell us that the extremely huge number of investors left the market, yet we have some group of other investors who was buying in that period at small bargain price – some traders decided to satisfy demands of those who were leaving the stock market in panic.

In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five year period.26 Their conclusion was that stock market returns are more volatile than a Gaussian distribution but less volatile than a Lévy flight.Stock Market Crash