Dow Jones PANIC Selling Crash of 7.3% Worst Since 1987

By: Nadeem_Walayat

The Dow Jones led Global stock markets into a continuing to crash as there is no end in sight to the panic selling which today was sparked by the failure of the LIBOR interbank rate to respond to Wednesday unprecedented co-ordinated interest rate cuts by the U.S. Fed, Bank of England and the European Central Bank (ECB), in conjunction with extra liquidity and in Britain's case a bank bailout package that could total as much as £500 billion or 41% of GDP which is on par with the amounts as a percentage of GDP the United States required to recover from the 1930's Great Depression.

The failure of LIBOR to respond is evidence of systemic fear gripping the financial sector, especially in the light of the next big ongoing credit crisis blow-up in credit default swaps as the recent article highlighted that had already claimed the worlds biggest insurer AIG

Chart Courtesy of Bigcharts.com

The Dow Jones had managed to trade near yesterdays close for much of the trading session until a break below the 9000 level towards the last hour triggered panic selling which took the Dow Jones down 678 points for a fall of 7.3%, beating the crashette of 29 Sep 2008 Dow Jones Stock Market 777 Point 7% Crash. and the worst % drop since October 1987. The Dow Jones is now down more than 20% in 6 days which is close to the 1987 crash 22% drop.

Stock markets continue to be hit by the deleveraging of huge derivatives positions, as I have voiced several times over recent months ( 09 Sep 2008 - BANKRUPT Banks Wiped Out by Tulip Backed Securities) , that forced selling of assets in response to margin calls as asset prices fall would lead to several crashette's as the governments employ mechanisms to prevent a single one day crash that occurred in October 1987, which is what appears to be transpiring.

Deleveraging coupled with the stock markets attempting to discount a deep recession which will result in significant contraction of corporate earnings and thus make current corporate valuations meaningless in advance of the recession which will significantly elevate the price / earnings ratio's at the same as stock prices fall sharply, as has occurred with the finance and banking sectors.

The UK FTSE closed lower on Thursday at 4314, down 30% on the year to date with the expectation of a sharp plunge on Fridays opening especially in the light of panic selling in asian exchanges which had seen the Nikkei fall by more than 10% in early trading. The FTSE 100 Index could witness its biggest plunge since the 1987 crash today if it were to break the psychologically important 4000 level which requires a fall of 7.2%. A break of 4000 would trigger a further crash that would see the FTSE fall more then the 7.9% crashette of 6th October 2008, especially as behaviour of the Dow Jones into Thursdays close implies that there could be further significant selling on Wall street on Fridays open and hence further selling by London in advance of Wall Streets opening that would put further pressure on the market for a break of the 4000 level. If the panic persists, we could even witness an emergency US Fed Interest Rate Cut before Wall Street opens.

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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