Ye still thought the unanticipated market plunge was reasonable, considering the earlier over-performance of the market.
“There was a sign on Friday,” Ye said. “I sold all stocks, but forgot to cancel one pending transaction.”
Ziyu Liao, a junior who has been investing in the market since high school, shared a similar perspective. He said early signs could be traced to Feb. 2 when the Labor Department reported the 2.9 percent jump in annualized earnings, indicating that the Federal Reserve would take an aggressive stance on interest rate hikes in order to control the inflation.
“If you look at the interest rate side, you get people who were upset about the interest rate hike, which, of course, implied that the future discount rate of cash flow, and that means companies were less valuable because you squeeze your opportunity cost to capital,” Liao said.
Concerns over potential inflation and the Fed’s interest hikes might have triggered the initial decline, but the ultimate 1,000-point-plus drop was about more than that. One of the fundamental reasons leading up to the selling climate was the market fervor of shorting the Cboe Volatility Index, VIX, which measures the expected volatility of the S&P 500 index.
Some traders bet volatility would stay low, even as VIX soared from below 20 and peaked at around 40 on Feb. 5, levels not otherwise seen since the financial crisis. VIX usually hovers around levels that range from 15 to 20.
“The people who were shorting the VIX would essentially lose all their money and got completely wiped out,” Liao explained. “And when people started losing money, they were forced to sell out of position, so it increased a kind of spiral awareness when more and more people are forced to sell out their position.”
Despite the market panic, Liao said he was less affected because he was a more opportunistic trader, who concentrated more on short-term investments.
“I’m exposed to particular event, which means that when you have company A buying company B, I’m betting on how it is going through,” Liao said. “I’m not betting on the overall market.”
Chris Roush, director of the Carolina Business News Initiative, said he did not pay much attention to the flash crash nor make any adjustments to his own portfolio.
“The stock market dropping 4 percent in one day is unusual, but not unique. It has happened in the past,” Roush said. “Despite the drop, the market is still above where it was a year ago.”
In the end, Roush said he hoped students who are investing in the market can focus more on the long run.
“The market is not a game,” Roush said. “It is a way to grow money for a long-term purpose. It is risky to be day-trading and buying and selling on a regular basis.”