Terrible day today, red across the board.
Does anybody know the mechanics of how or why this happens?
It seems to happen fairly regularly in an overall uptrend - every few months.
Do all of the institutions wake up on the same day and decide they're going to sell? Is it co-ordinated? Or algorithms kicking in like dominos?
often lower prices trigger VaR reduction as volatility spikes. As vol and fund managers VaR spikes further this triggers more selling. VIX was trending down but spiked this week.
My broker, HL, said it was because of weak Asian session and Fed minutes, Fed reserve may slow stimulus. So just following other markets, the US was also down quite a bit.
Hopefully they will bounce back tomorrow.
Yes indeed, nasty day for the markets!
In regards to understanding how/why the markets sell off is a question that is near impossible to answer. Unless you have the resources and contacts to interview every participant in yesterday's session (on the sell side), you never truly know the reason.
The underlying mechanics of why the market sells off is highly ambiguous and complex, largely driven by market makers and algorithms, in an attempt to create fear. Financial news outlets compound this fear by drawing connections to some news event (which isn't always true).
Recently, a funny comparison I've seen was when $KO sold off a few percentage points because Ronaldo moved some Coca-Cola bottles from the table during a Euro 2020 press conference!!
This is why I always cringe when I see people "Google" why prices are down because they just get sent to a Financial news site, with a woolly explanation.
Anyway, I digress a little. During bull markets, institutions love to "shake the tree". This is where market makers create volatility to shake out participants and then institutions buy the dip. The retail trader must decipher whether this is one of those situations or something more serious (you can use price and volume to determine whether the dip is being bought up).
Because the reasons why are not clear, my (simple) way of looking at it is:
"The reason why a transaction takes place is due to fear. Sellers sell, because they fear losing more money and buyers buy because they fear missing out"
From my experience in the markets, less time should be focused on understanding why the market has moved and more focus on how you plan to react (if at all). It's all about accepting the market for what it is and having a plan for these inevitable down days. Whether that's switching off the laptop or closing out your positions will depend on your style and strategy.
Hope this helps!
BH
I read an article yesterday which stated that the sell off was due to the European Central Bank looking at the possibility of raising interest rates.
some excellent points below. My own strategy on days like this is to switch off my phone and forget about the market for a day or two...
