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Market Turmoil – Logic or Emotions?

Thursday’s midday sell-off plunged the Dow nearly a 1000 points, most severe one day drop ever in the history. However, Dow managed to rebound most of its loss and close down 347 at 10,520.

Is Thursday’s slump really as severe of a crisis as the market turmoil of 2008 when all the major indexes lost 3 percent in a day, similar to today? Or is it merely emotions running hay wild? The latter seems more appropriate when analyzing a combination of factors that triggered Thursday’s largest intraday drop.

Factors that triggered Thursday’s Sell-off:

1. Traders are concerned about Greece’s economic problems. European leaders have pledged to provide Greece with $146 billion in loans over the next three years causing many to question the attempts by the nation to bring down its deficit. Investors are concerned that the size of the bailout will make Europe less able to help Spain, Portugal and other debt-plagued nations. Much of Dow’s drop for the last few days can be contributed to the global worries that Greece’s problems will hurt other European countries and eventually the U.S.

2. A technical glitch in the system caused the market to panic. Reports indicate that Proctor and Gamble’s error was responsible for 172 of the 997-point decline during the steep half hour drop. This error added fuel to the already burning European issue.

3. Further fire was added by media reports during the tough half-hour intraday period of a 1000-point drop, which sent investors selling out of panic. Only 173 stocks rose on the New York Stock Exchange while 3,002 fell. Volume came to an extremely heavy 2.57 billion shares.

4. Emotions were accelerated by the “Sell in May and Walk Away” belief. The old adage that one should sell in May and walk away has been around for years. Selling pressure from the last few days weighed down on the stock further. The intraday market turmoil added fuel to the believers of the adage—a classic case of sentiments over logic.

So are we headed for a crisis? Probably not! Sentiments are going hay wild due to many emotional factors and erroneous reports, rather than logic. Greece’s worries are justified, but let’s not forget the positive economic reports in the US. Data released this week shows the manufacturing and construction in the United States are rebounding is a good sign. According to the Commerce Department, personal spending rose 0.6 percent in March, the biggest jump in five months and personal income rose 0.3 percent. Such positive signs indicate growing consumer confidence in the domestic economy. Furthermore, April’s employment report is expected to show a growth in jobs, though most of it associated with temporary hiring for the 2010 Census. The likelihood of US being severely hurt by the European countries can be debated. This issue will show more rational colors in the long-term, but has only caused sentimental panic in the short-term. Contrary to the old saying, “Sell in May and Walk Away,” this year May might be a good time to buy long and stay in.