In a recent article, CNBC’s Jim Cramer discusses two flash crashes and provides advice on how investors can spot similar market events. Cramer emphasizes the importance of not panicking during a decline but rather understanding the reasons behind it, such as the fundamentals of the economy, and how to manage assets accordingly. He highlights that identifying when a sell-off is caused by market breakdowns can present incredible buying opportunities.
Cramer specifically refers to two short-lived sell-offs in 2010 and 2015, both of which were attributed to system failures rather than the overall state of the economy. Despite this, many investors panicked and incorrectly blamed global economic conditions or other factors for the sudden declines. Cramer recalls his own experience during the 2010 flash crash, where he believed it to be a “phony sell-off” as it did not align with the economic landscape at the time. It was later revealed that a large erroneous sell order had sparked panic on Wall Street. In the 2015 flash crash, Cramer suspected market mechanics were to blame since even recession-resistant stocks, such as biotech companies, were significantly affected.
Cramer draws parallels between these flash crashes and the decline of 1987, which saw the Dow plummet by hundreds of points within two days. He points out that these crashes were primarily caused by mechanical failures in the market rather than the broader economy. Cramer concludes by discussing the ineffectiveness of circuit breakers, which were implemented after the 1987 crash to temporarily halt trading and prevent steep declines. Despite their intention to provide a sense of security, circuit breakers have proven inadequate in preventing asset destruction, leading to a false sense of security that persists today.
Overall, Cramer urges investors to remain vigilant during market declines, focusing on understanding the underlying causes rather than succumbing to panic. By recognizing potential flash crashes caused by market mechanics, investors can identify valuable buying opportunities and protect their assets more effectively.