Here’s why. An hour after the market opened on Tuesday, the Dow was down about 200 points. Things looked grim. Trading in many stocks was erratic because sell orders were flooding in but buy orders were a mere trickle. Then, I’m told, large computerized buy orders for hundreds of stocks appeared, firming up prices, letting orderly trading resume, touching off the rebound.
The big computerized buyers? Guy Wyser-Pratte of Wyser-Pratte Management says it was program traders taking advantage of the disparity between the price of S&P 500 futures and the prices of the 500 underlying stocks. ““Every trader in New York and Chicago saw it coming,’’ he says. People sold futures, bought stocks and locked in a spread.
Vanguard Group managing director Gus Sauter, who runs the company’s index funds, says asset allocators were active. These players shift huge pools of capital rapidly among stocks, bonds and other investments, based on those assets’ price relationship to each other. The combo of lower stock prices and lower interest rates made stocks relatively more attractive than bonds. So allocators sold bonds and bought stocks.
But suppose interest rates had been moving up as stock prices fell, which is often the case? Who knows what would have happened? It looks like the market’s recovery was a close call rather than a sure thing. We stockholders were lucky this time. Next time, who knows?
