The Market Vision Chronicle - Jan 15, 2011: Market Crashes, Onion Prices and More..

At Yahoo: Market Interventions

I write at Yahoo on Market Interventions:

(Posted in entirety)

There were riots in Bangladesh on Monday when markets went down 9% in an hour. Stocks fell, presumably because their central bank decided to tighten down on bank exposure to equity, and the general index has been slowly sliding from December. It may sound unreasonable to have such an event create a loss of 9% in a single day — or indeed the 27% loss in a month that Dhaka saw — but it comes on the back of a 2010 that saw the index rise 95 percent. Now that fall doesn't seem quite as bad, does it?

Shaken by the public furore, Bangladesh's central bank instructed banks to please buy stocks — and as expected, their index rebounded by 15% on Tuesday. The idea is to never mess with a good thing, I guess.

Intervention doesn't always work. In 2008, Pakistan's stock markets fell about 43% and to somehow stop that, the authorities decided to set a floor price on the index; meaning, stocks couldn't go below a certain value. What happened then, was that the floor became a ceiling — stocks would simply not trade above that level. When the floor was removed in December 2008, stocks fell another 35% before they rebounded.

Short Take: Recovering from a Steep Loss is Tougher

Our latest Short Take is on how difficult it is to recover from a steep loss in a stock.

It's substantially more difficult to get back to "Break Even" when a stock falls by a lot. Deepak talks about why and what you might want to do to protect yourself.

  • When a stock falls a lot it takes that more effort to recover
  • The steeper the fall, the more effort you need
  • What you can do - stick with a stop loss
  • Or, if you've got a sinker, consider whether it is likely to perform better than other stocks.

Examples: DLF, Satyam, Media, Telecom stocks, 2007-2010.

(View the Video)

Syndicate content