CNBC’s Jim Cramer examined two recent flash crashes, telling investors how to spot similar market events.
Cramer emphasized that it’s important not to panic in a decline, but to figure out why it’s occurring, whether it’s related to the fundamentals of the economy and how to handle your assets.
“If you can figure out when a sell-off is caused by the mechanics of the market breaking down, then you might have an incredible buying opportunity,” Cramer said.
Cramer discussed short-lived sell-offs in 2010 and 2015, both of which he said were caused by system failures by the market, not the economy itself. Yet, during both flash crashes, Cramer added, investors panicked, pinning the sudden declines on the global economy or other factors.
On air during the 2010 flash crash, Cramer said he felt the crash was a “phony sell-off” as it didn’t reflect the economic landscape at the time. It later came to light that a large errant sell order caused panic on Wall Street, he added. In 2015, Cramer suspected something had gone wrong with market mechanics because some of the hardest-hit stocks were ones usually immune to recessions, such as biotech companies.
Cramer likened these flash crashes to the decline of 1987, which saw the Dow drop hundreds of points in the span of two days. This crash, he said, was also caused by a mechanical failure of the market, not the economy itself.
“I think investors weren’t ready for either flash crash because, post-1987, the government had put in what are known as circuit breakers,” Cramer said. “They were supposed to cool these declines by stopping trading momentarily. But the circuit breakers created a false sense of security that, oddly, still exists today, even as they failed to work properly on both occasions and did very little to stop the destruction of your nest egg.”
