Is the stock market decline really due to panic selling?

Although retail mutual fund investors have been shedding stocks during the financial crisis, the amounts are rather puny compared to the amounts of raw cash that hedge funds throw at the markets for short-selling. In fact, AMG Data Services reports that for the week ended Wednesday, October 22, 2008 there were actually inflows of $686 million to equity mutual funds. The idea that the stock market decline is "panic" selling is complete nonsense and contrived by hedge funds solely to drive down stock prices to profit from their short sales.

In all honesty, there was no great fundamental shift in the outlook for the economy and business over the past 24 or 48 hours, so the idea that suddenly "panic" is a factor is ridiculous.

One factor is that the media is rather clueless about how the stock market works and does not understand short-term trading in contrast to speculation and even investing. Technical traders and speculators look at the price charts and make a judgment as to where "support" and "resistence" levels are likely to be and take long or short positions according and then revise positions as these different price levels are approached, reached, or exceeded on either the up or down side. When a "break" occurs, they dramatically increase positions and ride the momentum until it dies out or the next support or resistence level is approached. None of this has anything to do with either economic or business fundamentals or even so-called "panic."

The only "panic" is from overwhelmed market specialists (the guys on the floor of the New York Stock Exchange that you always see in media photos when the market moves wildly) who are working frantically to keep up with the pace of order flow and rapidly changing prices.

Hedge funds do not usually spend so much of their energy and capital on mere short-term trading of stocks, but since virtually all of their usual speculation strategies appear to have broken during the crisis as investors rush to "safety", they apparently have fallen back on the old tried and true market manipulation and short-term trading with massive amounts of capital to make a few quick bucks.

-- Jack Krupansky