The following snapshot from CNN-Money today shows an alarming trend over the past five days that we have not seen since October 2008. Notice the decline of the overall NYSE Dow Industrial Average at the end of each trading session:
What does this mean?
In the last hour of the day, trades are executed by large brokerage/investment firms for buy/sell orders of mutual funds. If you buy or sell a mutual fund at 9:30 AM, the trade is not executed until the end of the day. When the stock market collapsed in 2008, we saw the same pattern as people dumped their mutual funds and the market declined sharply in the last hour of each day. Imagine this picture without the large corporate purchases of stocks to fund company 401K plans without regard to price at the end of the day to offset these declines.
If a market panic occurs early in the trading day, you can buy or sell actual stocks in real time but you are out of luck for selling or buying mutual funds until the end of the day. This is a simplistic overview and does not take into account some built-in market safeguards but the trend is clear.
Let us hope that we are not in the beginning stages of late October 2008.
Click here for an analysis of Quantitative Easing III.