Last Thursday, even as we were discussing algobots and HFT, Dollar Tree stock experienced a flash-crash early in the trading day, dropping about 18% in the opening two seconds of trading. From there it went on to regain most of it throughout the day, closing down about 2%, from $50 to $49.11.

For investors with anything less than a 20% stop, this could mean that you were stopped out with no chance to recover your losses since the stock moved back up quickly. And there is further speculation that this is the work of bots and market makers, basically stealing away value from stockholders by stopping them out, buying at the low price, then gradually selling it off as the price returns to normal.

Keith McCullough, CEO of Hedgeye Risk Management, sees this as something we can expect to happen more often.

At the end of the day, this kind of stuff is going to be ongoing because the machines are contributing the only margin that’s really left in the broker-dealer community. You saw this issue with Knight Capital… We think these issues are endemic and structural. “They’re not going to do anything for investor confidence.

I would have mentioned this last week if I’d seen it. But it’s such a blatant illustration of a problem in the markets that it can’t go without examination.

Before the last ten years this had never happened. We had devastating down days. But for a stock to lose a fifth of its value in less than 2 seconds wasn’t only unheard of, it was impossible. You had to have actual sellers ready and willing to sell at that level. It simply didn’t happen because we’re too cognitively limited to make decisions that quickly.

Welcome to the world of quants. It’s said that broker agents are going to the wayside, being replaced by math and programming wizards. Then the supercomputer sits in the place of the hedge fund trader, raking in billions through millions of microsecond trades every day. There’s just no way to compete.

But, as we’ll see tomorrow, banks are beginning to step back and take a look at our old standby, gold. Countries are looking at gold. In fact, while we should be, we’re a little surprised at some of the data that came in recently.

Consider these things as you set up your portfolio. There are some good companies out there that are worth holding. But the days of continuous growth that made men such as Warren Buffet what they are today are gone. Today the day trader runs the show in a market that is overtaxed, overpriced and artificially supported through a coalition of Wall Street, Capitol Hill and the Federal Reserve. With this in mind, the investor needs to really be on top of his game in a way he didn’t a few years ago.

And this is another reason to follow the banks’ lead and consider a strong position in metals. Whether you take delivery or put them in an IRA, you’ll have history’s true money regardless of the economic fallout to come.

For your prosperity,

J. Keith Johnson
The Gold Informant