Panic sell? Rational sell?

Yesterday marked as one of the most dramatic trading day in recent history. The US Fed cut 75 basis points before the market opened. Everything almost opened at the lowest point of that day. Well, that makes me think why. The cut came in before the market open, and all stock prices just shot right back up after they opened at the lowest point. Has the basics of the stocks really changed from the open to 30 minutes later?

Of course not. You see the power of margin calls and overnight positions. Unfortunately investors who got hit by the over-leverage needs to sell to raise cash. I don't have any solid numbers here but I believe that is how it works. Some investors at that very moment were forced to sell. And since they were forced to sell, they were price-takers, and they could only be price-takers, because they didn't have a choice. There are sharks out there to eat them and took this chance to buy at the lowest price of the day.


Usually under this situation we call this panic selling. Well, just sit back and think about it, amateurs only represent a small portion of the investing population moneywise. So even amateurs were not using leverage and just plain panic sell will not cost the market to go down so much, so fast. I can almost guarantee to you that the market went down so fast was largely due to margin calls. When margin calls come in, it's not panic selling. It's rational selling. At least in the eyes of your broker. So next time, don't be fool by the media that market goes down due to panic selling.

Looking at today and yesterday market's performance. I think a short term bottom is formed. It is again due to margin call selling. Different leveraged-investors entered their positions at different price levels. A huge solid white candle with hugh volume probably means at these price levels margin call sellings are done. Unless the market moves down more, that is, moves below the bottom of the white candle, in the meantime it probably will not trigger another round of margin call selling.

But of course there are still trimming along the way up as investors are getting nervous and pessimistic. Those are mostly not margin call selling, so the selling will be less powerful.

I'm glad that I got into HGU and HFU at the bottom since Tuesday close. Since I already have a closed-end fund invests in Canadian financials, I'm looking to sell all my HFU if it touches the 50-day EMA. If the Canadian financials can go up more, I'll see if I can sell my closed-end fund for now, as I think in the meantime I have too much long position.

Looking at SKF, SRS, SDS, DXD, TWM and QID, they all displayed consecutive two big black candles. In the short term it is not looking good. But other than QID and DXD, all the other ETFs is having its 20-day EMA > 50-day > 100-day > 200-day. So unless there are signals that they are reversing at significant volume, they could be good bet when near 200-day EMA.