ETF Periscope: Chinese Flash Crash Reminder That Volatility Lurks Always

“He who asks a question is a fool for a minute; he who does not, remains a fool forever.” -- Chinese Proverb

If you happened to blink last Thursday, you probably missed an event that contains powerful implications for investors and, well, pretty much anyone who has a stake in the economy.

That’s when China’s Shanghai Composite Index experienced a 6% swing, going from a roughly 1% loss to a 5.6% gain. And this happened over the course of a mere two minutes.

To put that in perspective, the Dow Jones Industrial Average (DJIA) would need to undergo a 900-point swing to experience a similar move.

In other words, it was a huge intraday move, but a staggering two-minute one.

Though the Shanghai Composite Index ended pretty much back where it started prior to the surge, the damage to the psych of investors in China’s stock exchange had to be significant, something that its equity market can hardly afford.

China’s equity market has suffered a 40% loss over the last four years, a period that has seen the U.S. equity market rise by over 100%.

The Shanghai Composite Index’s wild two-minute ride mirrors, to a certain extent, other “flash crashes that have occurred over the last several years, including the 2010 event that saw the DJIA tumble nearly 1,000 points in just a couple of minutes.

True, the Blue-Chip index did recover almost immediately, but the event did bring to light what had been a serious concern of numerous market observers -- the inherent dangers in an entirely electronic trading system.

Yet another version of a flash crash occurred back in August of 2012, when a “technical glitch” was the apparent cause of a $450 million loss by Knight Capital Group.

Technical glitches have also been given as the cause of similar flash crashes that occurred on India’s leading exchange as well as Japan’s leading futures exchange.

As to the cause of China’s first flash crash last week, the China Securities Regulatory Commission attributed it to an “automated error” in Everbright Securities Company accounts, rather than a human error.

The fact is that, ultimately, the cause of the event is secondary to the fact that it has occurred at all.

What should be more of a concern to investors is that these flash crash “events” are more likely to increase in frequency, rather than decrease. It is simply a matter of probability, based on the ever-increasing electronic activity on the world’s leading exchanges.

Hedging against such volatility events should be on the radar of every investor these days, and worthy of the time it takes to get up to speed on the hedging tools of preference for each investor.

It is simply a reality of today’s markets. Proceed uninformed at your own portfolio risk.

What the Periscope Sees

The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis.

This week sees a continuation of the last several weeks, with the Technology Sector still sitting atop the heap of the SectorCast rankings.

The Tech Sector’s score has dropped somewhat, with its current Outlook Score at 86. Following up Tech is the Financial Sector, which is now a close second with a score of 80. In at third is the Consumer Goods Sector, which came in with a score of 69.

Here is the current list of some of the top-performing Technology Sector ETFs year-to-date, as of the end of the third week in August:

FDN -- First Trust Dow Jones Internet Index Fund, +26.35%

SOXX -- iShares PHLX SOX Semiconductor Sector Index Fund, +21.00%

FXL -- First Trust Technology AlphaDEX Fund, +19.93%

SMH -- Market Vectors Semiconductor ETF, +15.74%

QTEC -- First Trust NASDAQ-100 Technology Sector Index Fund, +18.68%

IGV -- iShares S&P GSTI Software Index Fund, +16.12%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.


ETF Periscope
daniel / Tag: DJIA, COMP, SPX, FDN, SOXX, FXL, SMH, QTEC, IGV, VGK, Flash Crash, volatility, Shanghai Composite Index /