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Make your wish list for the next crash

As the Dow, S&P 500 and Nasdaq slammed down on the open Monday, we got a firsthand look at what indiscriminate selling looks like.

The initial trigger was a likely a combination of spillover from Asian and European markets. As these closed at their lows, traders who provided exits (were buyers) had to hedge that long exposure as best they could and that meant selling in U.S. pre-market as well as on the open. This pressure took futures down triple digits which, I imagine, panicked some investors and they entered orders to sell their long positions and cut the pain.

Some were likely prudent enough to offer these trades at a limit price, but a host of others and a clear majority must have entered market orders, meaning they would sell at ANY price. It's this indiscriminate selling, from these individuals and from brokers selling to satisfy margin calls that put the turbo on the market selloff.

In virtually every case we examined using our Heat Seeker technology, the opening price of securities was 3 percent to 7 percent above the lowest traded price, which came within mere moments of the 9:30 am open. Apple for instance opened at $94.87 but immediately traded to $92 (down 3 percent). Facebook opened at $77.03, but traded to $72 (down 6 percent) in minutes. It was this second leg down that took market losses to a paper loss of $1.2 trillion just after the open.

Santa and list
H. Armstrong Roberts | Retrofile | Getty Images

Despite the haphazard selling, some, including our wealth-management firm elected to be buyers on the open. I imagine one reason the buyers jumped in was they were adhering to the Warren Buffett adage, "buy when others are fearful." While this certainly played into our thought process, the primary reason we punched the "buy" button was because stocks on our wish list, which included Disney, Facebook, Exxon-Mobil and Apple were indicated for sale at 2 times the broad market distress. In plain English, if the S&P 500 was selling down 4 percent why was Apple, which closed Friday at $105.76 being indicated at $98, a drop of 7 percent? Or Facebook, which closed at $86.06 being indicated at $77, a drop of 10 percent? To us, this was THE opportunity we had waited for and why we'd kept dry powder.


The second leg down just after the open had to be a combination of sell orders that were not executed on the open and margin selling. Both of these types of sellers are the textbook definition of indiscriminate. The margin clerk has one job, liquidate the long holdings of clients that failed to meet margin calls. He or she goes to the market with shares, and the high-frequency-trading firms that had just taken down that mass selling at the open would do what the algorithms were designed to do; fade bids in a nanosecond. The speed at which this happens was eerily reminiscent of the May 6, 2010 flash crash, as bids seemingly disappeared only to resurface as fast as they vanished. In point of fact, our systems showed the bids never disappeared, but since the human eye can't distinguish individual moves at rates faster than 24 frames per second (motion pictures), it's not surprising the bids seemed to vanish as nanoseconds are thousands of times faster than 24 frames per second!


Whatever the reason(s) for our next market crash or melt down, this much is true; get your buy or sell list together and enter it at the level you're comfortable buying or selling. Don't focus on the missed opportunity at the absolute bottom, or top of that day's range. It would be sheer luck or coincidence to catch either given the speed of trade.


"Fast Money" trader Jon Najarian is a professional investor, money manager, media analyst and co-founder of optionMONSTER and tradeMONSTER. He worked as a floor trader for 25 years and before that, he was a linebacker for the Chicago Bears. Follow him on Twitter @optionmonster.