For those that follow me, I am a skeptical trader and investor.  I have learned over the years of trading never, ever trust the market.   So when the market screams in March & April, I was underinvested.  When the market crashes like May 6th, I am protected.   Going forward, don’t care what the market does up or down, never have, never will, but I wanted to throw out a theory of what I believed may helped create the market crash on May 6th:  Internet social networking.

I have been using twitter and Stocktwits for over one year, and what I have found is an incredible tool for real time trading information, absolutely no doubt, it’s a must used tool in any trader or investors box.  However, I have also Stocktwits to be a tool for misinformation and miscommunication as well.  This is what happens in real time markets, the action is quick, usually fast.  However, March & April was a strange time.  The VIX, which measures volatility, was unusually low, which means almost any and every stock pick that was picked on the long side went up.  It was almost like investing in the market was safer than a CD at a bank, and certainty with these interest rates, more profitable it seemed.

For an end user of Stocktwits for over a year, what is noticeable about the tool is when a stock is moving, it’s all over the real time stream.  For large caps, the information is usually spot on correct.  However for small caps, it’s usually motion creates emotion & creates a chart pattern.  Here are a few examples of this that I have seen on the stream, and then I will connect this back to May 6th action:

JOEZ - Stock is one of Stocktwits hottest mentioned stocks on its way to earnings, setting new 52 week highs based on chart patterns and positive stream sentiment.  JOEZ releases earnings, beats numbers, but now is crushed almost 50% off it’s highs.  JOEZ no longer a talked about hot stock on the stream.

FTBK - A now halted bank stock, ran up almost 200% in one day, on no news at all.  I tweeted out that the FDIC would take this over and this bank was hurting on the run after not being able to locate short shares.  FTBK no longer a talked about hot stock on the stream.

GMCR - Granted, a huge success and a huge mover in two years, but on the move to 100 the Momentum boys were all over this thing due to the chart and constant Stocktwits mentions keeping the name in the news.  When earnings came in slightly inline, stock crashes 30% and is not longer a hot stock talked about on the stream.

I have other examples like this as well both bad & good, but here comes the connection back to May 6th and a theory.  I think it’s entirely possible that due to the march & April runs, inexperienced retail investors and traders became way to comfortable with stocks and risk.  Most new investors this year only know the charts of a company without knowing anything fundamental regarding them.  This is what a low VIX creates, & I think most people were fully invested in the market. 

So on May 6th, when the DOW was down 250 points and CNBC was showing the riots in Greece (What a piece of crap network this is by the way), a perfect storm took over.  The retail trader who rode the charts in march & April without knowing any fundamental information about their stock panicked when the S&P 500 broke its support level of 1120 and flooded the market with market orders.  This lead to the FIRST step in the decline that then made the hedge funds puke along with retail, then the QUANTS and ALGOs go berserk for a few hundred quick DOW points.  Where the retail market orders filled who knows, they got screwed, until the QUANTS and ALGOs took back over and corrected the market.

So, what am I saying here, that JOEZ crashed the stock market on May 6th?   No, absolutely not.  What I am saying is you can apply the JOEZ example to hundreds of stocks out there that were overbought on the chart without fear, & when the emotions shift quickly and someone does not know what they are holding they just dump it.

Again, this is just my theory.  Everyone wants to blame a fat finger, the market makers, wall street is crooked, etc.  When I was watching it live that is what I thought too.  Maybe this ends up proven to be, we will see in time.

Going forward, this is a welcome correction, and believe it or not is HEALTHY.   Just keep in mind KNOW WHAT YOU OWN, because when it drops off the hot stock list, you will be abandoned and without a life raft as May 6th suggests.

JW