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With the recent downturn I’ve been hearing a lot of chatter about a possible stock market crash in 2011. This is to be expected with people still having the crazy price action of 2008 in their recent memory. But the fact remains that a quick and heavy crash like we saw in 1929 and 1987 probably won’t happen in this day and age. I would venture to guess that if the market is doomed, it will go down over a the span of a few months (with flash bounces mixed in). This is more in tune to what we saw in 2008.

Many people like to point to the fact that computer and algorithmic trading makes up such a huge part of the daily volume traded and that in turn could result in a massive crash. While I’m far from an expert of the subject of computerized trading, I would venture to guess that this same software that’s set to sell at certain points is also programmed to buy. Granted if a stock market crash happens, these programs may not register buy signals but neither you nor I know that.

Another thing to keep in mind is that the government plays such a big role in today’s stock market that it will probably step in to stem any stock market crash that is happening. Say what you want to say about their actions in 2008/09 but the government’s interference with the free market system did place a safety net below the stock market.

A stock market crash makes for a good story in the media and in 2011 we have so many different sources in our ears that the hype of crash rumors can spread like wildfire but it’s important to remember that hype is just hype, and more often than not, it doesn’t live up to expectations. As a stock trader you should always have an exit plan but it should be based on your own trading strategy not some crazy stock market crash rumors and hearsay. Also, it’s important to keep in mind that massive declines in a day or two are quite rare. But if the fears of such an event keep you up at night, maybe it’s better to lighten the load in your portfolio and take a more defensive stance, at least until you start feeling about about the market’s future.

This entry was posted on Tuesday, June 7th, 2011 at 11:30 pm and is filed under Investing Advice. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.