Cooler Heads Prevail as Stock Market Takes Dramatic Swings

August 24, 2015
The NYSE opened nearly 1,000 points down following major changes in China's economy.

By Michael Hill

The bell sounded on the New York Stock Exchange and the market fell like a ton of bricks –- plunging a thousand points.

“The opening today was one of the sloppiest, nastiest, most panicky opens that I have ever seen in this business and I’ve been in the business over 30 years,” said Scott Rothbort, finance professor at Seton Hall University.

Rothbort offered advice from his free newsletter ‘Don’t Panic.’ He says after the market’s tumble last week, investors and electronic trading systems put in a ton of orders in a panic over the weekend to sell when the market opened.

“And we had another one of these flash crashes in the morning,” he said.

“This is an event that everyone knew was coming for a long time,” said George Calhoun, who runs the Stevens Institute of Technology’s Hanlon Financial Systems Lab.

Calhoun traces the market’s recent gyrations to what he calls China’s unprecedented economic growth. He says China’s economy has grown so fast that stocks there were overvalued and as a result the bubble was bound to burst.

“In China’s case the word is accurate, it’s a correction because their system had gotten into a state of disequilibrium on the upside and it was going to have to come back in. I think in the US, it’s more, I use the word response,” he said.

Analysts say China’s and the global economy are slowing, indicated too by falling oil prices. But, Calhoun says he doesn’t think the selloff foretells anything bad about the US economy — it’s just a shock wave the US markets will weather.

“Why the panic? Why this extreme overreaction? I think a lot of it is the market has kind of gotten hyped up by the technology factor where things now happen so quickly that might have taken place over a longer period of time originally, they get compressed into a single trading session,” said Calhoun.

He says professional traders tend to like a volatile market, but they’re under more pressure than the retail or long-term trader to make money in such an environment because they must perform for their clients.

“The advice for the retail investor is to stay the course and to recognize that the volatility is just that. It’s only volatility and unless you sell you didn’t lose anything,” Calhoun said.

The Dow ended down nearly 600 points as investors went bargain hunting.

“Clearly it wasn’t worth being down a thousand points. So what happened was cooler heads prevailed. The smart professionals such as myself said ‘well, you know what, I can get something a lot cheaper today than I did the other day and the evaluation hasn’t changed’ so they snapped it up,'” Rothbort said.

He says today proves there’s money to be made in the markets big swings.