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Archive for Thursday, August 11, 2011

Stocks resume sell-off; Dow finishes down 519

August 11, 2011

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— Back to reality and back down, Wall Street focused on the bleak landscape ahead for the economy Wednesday and wiped out its big gains from a day earlier — and then some.

The Dow Jones industrial average closed down 519 points and has now lost more than 2,000 in less than three weeks. Swings of several hundred points in just minutes, accelerated by computerized trading, have become commonplace.

This time, the selling was intensified by worries about Europe.

American bank stocks took hits because investors fretted that debt problems overseas might reach the United States.

France came under pressure amid concerns that it could follow the U.S. and become the next country to lose its top AAA rating.

The French president cut his vacation short and promised to slash the nation’s debts.

The stocks of leading banks in Britain, Italy and Germany were hammered. The fear is that if European governments default on their bonds, it will hurt the European banks that own them.

That could start a chain reaction that hurts the United States because large U.S. banks have loans to European banks. The result on Wall Street, which already has economic problems to worry about, was a dramatic turnaround.

On Tuesday, the Federal Reserve said it planned to keep interest rates ultra-low for two more years. After some initial confusion, the stock market staged a huge comeback and had one of its best days.

But the interest-rate news proved to be a distraction. The Fed made the pledge because it sees almost no chance that the economy will improve substantially by 2013, and when investors focused on that, they dumped stocks again.

“Now it gets back to the fundamentals,” said Mark Lamkin, founder of Lamkin Wealth Management, which manages $215 million.

The Dow closed at 10,719.94, down 4.6 percent for the day. By points, it was the ninth-steepest decline for the market.

Wednesday was another day marked by big moves. The Dow was down more than 300 points within minutes of the opening bell. It recovered some of that loss, then drifted steadily lower in the last two hours.

The market has traded that way for two weeks, lurching up and down.

The most extreme example was Tuesday, when the Dow swung more than 600 points in the one hour and 45 minutes after the Fed’s statement.

The stomach-churning highs and lows are reminiscent of the fall of 2008, the depths of the financial crisis, when there were swings of 800 or even 1,000 points in a day.

Computerized trading systems — programmed to analyze charts, capitalize on the tiniest changes in price and execute trades with no human intervention — are making the market rougher.

High-frequency trading programs make up about half of the trading volume in a normal market day but 70 percent or more on a volatile one. The programs pounce on stock changes to make just slivers of a penny but do it so often that it adds up.

Other investors also use charts and market indicators to make trades based on market momentum. The bet is that if the market is rising, it will keep rising, and if it’s falling, it will keep falling.

More investors are turning to this strategy because the sudden slowdown in the economy has left them unable to judge companies based on their fundamentals, like projected profits. The more people use a momentum strategy, the faster the indexes rise or fall.

The S&P 500 finished the day down 4.4 percent and the Nasdaq composite index down 4.1 percent.