Monthly Archives: February 2014

Beware Of The Role Of Short Selling And Stop Loss Orders In The Current Market Decline

For months we listened to investment experts on financial news programs advise investors to protect their positions against a market correction by using stop loss orders. As stock prices rose investors, who heeded the advice of these experts, placed stop loss orders at increasing price levels. As a result an inverse ladder of stop loss orders was created. When international currency issues and other factors set off a moderate market downturn some of the highest stop loss orders were automatically converted into sell orders and the market decline accelerated. Short sellers who have been on the side lines were able to accelerate the decline by selling short on downticks. They know the price on stock charts that chartists interpret as a sell point and begin to sell short on downticks in an attempt to encourage sales by chartists, the execution of stop loss orders and panic by fearful investors. The combination of stop loss orders, chart theory, short selling on downticks and ultimately panic and margin calls may set off a stampede leading to further market declines. Domestic and international economic growth are important to stock market activity, but the above described technical factors have a significant impact during a stock market market decline that may, because of the wealth effect and fear, lead to a downturn in economic activity.

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