Money Management: Inside May's crazy market crash

By Bozena Pomponio Dolan Media Newswires ROCHESTER, NY -- The stock market endured one of the most turbulent days in history on May 6. In less than half an hour, the Dow Jones Industrial Average fell 998.50 points, the largest intraday decline since October 1987, when the Dow lost 780.87 points. What made the recent crash so shocking is that it happened in a matter of minutes. At the closing bell, however, the market did rebound, ending the day down only 348 points, or 3.2 percent. The impact on some stocks was huge, but brief. Many exchange-traded funds disconnected from their net asset value and sold off more than their underlying stocks. In a short period of time, funds such as the Rydex S&P Equal Weight ETF experienced double-digit losses relative to their indices (some actually traded at a penny per share). Two individual stocks also had terrifying falls. Proctor & Gamble dropped almost 37 percent, from $62 to $39.37, in minutes. Consulting firm Accenture, which started the day at $42 a share, collapsed to just a penny before both bounced back. Traders and investors were left completely stunned and wondering what caused the significant fall. At the time, the markets were already under heavy selling pressure due to fears that the Greek credit crisis was spreading to Europe and the rest of the world. The massive sell-off was thought at first to have been driven by fears Greece's debt problems could impact the global economic recovery negatively. There also were rumors that a trader erred by accidentally entering an order to sell a billion shares instead of a million. As time passed it was determined that automated computer trading systems were the real cause for the massive sell-off. Because so much trading in the United States today is done electronically, such an error could have triggered the huge market downturn. With such an error occurring, computer trading intensified the losses as programs designed to sell stocks at a specified level kicked in, causing trades to be executed. Traders use the programs to try to limit losses as the market falls, which ultimately led to more selling as prices continued falling. To show the magnitude of just how turbulent the day was, anyone who was 100 percent invested into one of the major stock indices on May 6 at one point lost 10 percent of the total value of their portfolio -- potentially the total net worth for an individual. Such a huge loss was magnified by the fact that traders had passive, indiscriminate computerized programs in place so that trades were ready to go and executed based on an algorithm. In these cases, the impact was very detrimental to investors. Although the market crash was terrible for some, it presented opportunities to others. Certain firms such as Karpus Investment Management were able to take advantage of the opportunities. By using only limit orders and having humans constantly watch the market, we avoided any losses due to the technical "blip." During the minutes of uncertainty, we were able to buy stocks when they were down 30 to 40 percent. By taking advantage of a great one-time opportunity, tremendous gains were made for our clients -- another good reason to consider using a nimble, active manager to oversee an investment portfolio. Bozena Pomponio is an analyst/portfolio manager for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully's Trail, Pittsford, N.Y. 14534; phone (585) 586-4680. Published: Thu, Jun 17, 2010

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