Last week on the CNBC Web site Jeff Cox wrote an article, "Ready for 'Splash Crash', the Ultimate Market Meltdown?". The Splash Crash is the bratty child of the Flash Crash, just another step further in the evolution of High Frequency Trading. In the Flash Crash that occurred on May 6th, 2010, it is purported that High Frequency Trading caused the DOW to drop close to 1,000 points in the matter of minutes because of a lack of liquidity when a large sell order attempted to execute. This temporary decline in the markets was limited to one asset class - securities. However, with the Splash Crash, sophisticated and intertwined algorithms have taken a leap forward and will supposedly drag down a multitude of asset classes simultaneously - stocks, currencies, bonds and commodities.
This Splash Crash is a hypothetical situation and the probability of it happening is remote, but there just the same. The conventional wisdom of some traders is that this is a Black Swan event and they are preparing for the inevitable, not necessarily folding their tents, but keeping on their toes and rolling with the punches in case the market does take a nosedive. I disagree that this is a Black Swan event. It's a Gray Swan event. With a Black Swan event, situations that are considered impossible or unknown happen, like an extra-terrestrial landing on the White House lawn. A Gray Swan event dictates that the possibilities of the unexpected scenario are already known, but considered highly unlikely. With the markets going full steam ahead, some whiplash could be in store if in fact this Splash Crash or another Flash Crash does materialize. The chances of this occurring are slim, but it's good to be aware of the situation.
There is never an iron clad solution of what to do with your money in regards to the market, but the pearls of wisdom coming from a majority of analysts is to go long large-cap global securities. I don't like to overplay my hand, but I'm writing for an audience and it is no secret that I'm short some indexes and also hoarding cash. One of my holdings is the Direxion Small Cap Bear 3X Shares (TZA) and as of February 24th, they will be doing a 1 for 3 reverse split. This is the second reverse split that has happened to this ETF while I've owned it. It's been a dog to say the least, but I'm still holding on to it. If you own a security for a specific company and it does a reverse split, you should sell that stock immediately because the fundamentals of the company aren't good. The Direxion Small Cap Bear 3X Shares (TZA) mirrors the Russel 2000 three times to the downside and that index is not fundamentally weaker, it's just rallied so much that the price of the ETF has dropped off a cliff. I'll stick with it because it is a small percentage of the Ithaca Experiment portfolio and I still believe that it will rally. I may not recoup all of my losses with this one, but I'll take my chances.