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During the crash at the end of 2008, pretty much everyone was selling their stock and the market tumbled approximately 50%. Who purchased the stock? Was it market makers or other people? I understand that market makers always try to offset their positions, but if there aren't any buyers are they forced to accumulate?

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    Was it Market Makers or other people Both. Market makers because the law require them to do so, people covering their short positions and unsound investors ditching their investments selling to the market makers and people who might be buying during the crash, like Buffet. – DumbCoder May 14 '13 at 13:16
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    For every seller there was a buyer, thus there were more than a few buyers. Perhaps the prices had to correct downward enough to attract buyers, but for each share sold, it was bought by someone. – JB King May 14 '13 at 14:54
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Just before a crash or at the start of the crash most of the smart money would have gotten out, the remaining technical traders would be out by the time the market has dropped 10 to 15%, and some of them would be shorting their positions by now.

Most long-term buy and hold investors would stick to their guns and stay in for the long haul. Some will start to get nervous and have sleepless nights when the markets have fallen 30%+ and look to get out as well. Others stay in until they cannot stand it anymore. And some will stick it out throughout the downturn.

So who are the buyers at this stage? Some are the so called bargain hunters that buy when the market has fallen over 30% (only to sell again when it falls another 20%), or maybe buy more (because they think they are dollar cost averaging and will make a packet when the price goes back up - if and when it does). Some are those with stops covering their short positions, whilst others may be fund managers and individuals looking to rebalance their portfolios.

What you have to remember during both an uptrend and a downtrend the price does not move straight up or straight down. If we take the downtrend for instance, it will have lower lows and lower highs (that is the definition of a downtrend). See the chart below of the S&P 500 during the GFC falls.

Chart of the S&P 500 from Jan 07 to Jun 09

As you can see just before it really started falling in Jan 08 there was ample opportunity for the smart money and the technical traders to get out of the market as the price drops below the 200 MA and it fails to make a higher peak.

As the price falls from Jan 08 to Mar 08 you suddenly start getting some movement upwards. This is the bargain hunters who come into the market thinking the price is a bargain compared to 3 months ago, so they start buying and pushing the price up somewhat for a couple of months before it starts falling again. The reason it falls again is because the people who wanted to sell at the start of the year missed the boat, so are taking the opportunity to sell now that the prices have increased a bit. So you get this battle between the buyers (bulls) and seller (bears), and of course the bears are winning during this downtrend. That is why you see more sharper falls between Aug to Oct 08, and it continues until the lows of Mar 09.

In short it has got to do with the phycology of the markets and how people's emotions can make them buy and/or sell at the wrong times.

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    (In response to the 3rd paragraph). Don't forget people who bought according to a negative trend rule, e.g. the market drops by 30%, and didn't get spooked and sell when it dropped another 20%. There were investors (myself among them) who bought as much as we could when the market continued dropping, then readjusted our stops upward once signs of a positive trend emerged. It's not exactly DCA, so I think it's a 3rd group that's important to point out. For investors with a long-term horizon, it was easy money (ignoring index issues, etc. since I didn't focus on that at the time). – John Bensin May 14 '13 at 18:43
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    @JohnBensin - there are a wide range of reasons people will buy and/or sell at different times, I could not list them all, a large portion of it is to do with the irrationality of people due to their emotions. In regards to buying between Oct 08 to Mar 09, how do you know the market wasn't going to fall another 30% or more. For me, the earliest time I would have been looking to buy would have been June-July 09, when price broke through the 200 day MA and even better when there was a higher high. This is what TAs talk about timing the market, not about buying at the low in Mar 09. – Victor May 14 '13 at 20:23
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    In March 09, I would have preferred for the market to fall another 30%; I had a certain chunk of funds earmarked for a longer-term horizon, and I hadn't exhausted it with buys yet. The basket I was investing in wasn't going to disappear, so of course I would have taken a lower price if possible. Timing is great, but long-term? I preferred inevitability. Plus, keep in mind that I'm in the US and the basket I was buying contained SP500 equity. The SP has made up its losses; the ASX is a different situation. I'll buy again if there's another crash before 7-10 years before I need the funds. – John Bensin May 14 '13 at 22:31
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    I wasn't worried about the basket because it was diversified through a couple of major sectors. As for holding them to retirement, read my comment again: ..."before 7-10 years before I need the funds." A) This basket isn't my entire portfolio, and B) the part of this chunk that I need for retirement will be reallocated to less risky investments before then, and even if a crash happens right then, that's why I use risk management (as you've said yourself many times; I assumed you knew others use RM strategies as well). As for QE, again, I shouldn't need to point out RM again, right? – John Bensin May 15 '13 at 2:20
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    1) I mentioned stops in my very first comment... 2) I invest based on a set of rules, triggers, etc. that I follow even if my emotions, analysts, etc. tell me something different, 3) the relevant options/futures 4) depending on the investment, the standard RM strategy of "find something non-correlated" (it's more complex than that, but that's the simple version), 5) as much knowledge of the industry's fundamentals as I can gather. For example, I like the biotech industry, so I read the NEJM, Lancet, FDA releases, etc. to gauge what to look for, both for investing and risk management. – John Bensin May 15 '13 at 2:37
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If we can agree that 2010 was closer to the low of 2009 than 2007 then the rich did all the buying while the super-rich did all the selling.

Percent of all stock owned:
Wealth class 2001   2004    2007    2010
Top 1%       33.5%  36.7%   38.3%   35.0%
Next 19%     55.8%  53.9%   52.8%   56.6%
Bottom 80%   10.7%  9.4%    8.9%    8.4%

http://www2.ucsc.edu/whorulesamerica/power/wealth.html

Looks like the rich cleaned up during the Tech Crash too, but it looks like the poor lost faith.

That limited data makes it look like the best investors are the rich.


Market makers are only required by the exchanges to provide liquidity, bids & asks. They aren't required to buy endlessly.

In fact, market makers (at least the ones who survive the busts) try to never have a stake in direction. They do this by holding equal inventories of long and shorts. They are actually the only people legally allowed to naked short stock: sell without securing shares to borrow. All us peons must secure borrowed shares before selling short.

Also, firms involved in the actual workings of the market like bookies but unlike us peons who make the bets play by different margin rules. They're allowed to lever through the roof because they take on low risk or near riskless trades and "positions" (your broker, clearing agent, etc actually directly "own" your financial assets and borrow & lend them like a bank).

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p004001.pdf

This is why market makers can be assumed not to load up on shares during a decline; they simply drop the bids & asks as their bids are hit.

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