“Irrational exuberance” saved the day

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By Gerhard Lampen, Head: Sanlam iTrade

irrational exuberanceGlobal equity markets in 1996 were in a very bullish mood and that included the JSE. It was in the time leading up to the dotcom bubble at the end of that decade. I was trading big time in JSE ALSI futures for my personal account (ALSI Futures are like Satrix 40 CFDs). I was happily long (bought) ALSI futures which were in the profit on 5 December 1996.

I remember playing a bit of bridge with my stockbroker colleagues after work that afternoon. Just before the futures market closed, our dealer came into the boardroom and told me that the price hit my stop-loss and they closed me out (sold my position) at a small loss. I was furious. How could the Dow Jones fall so unexpectedly and quickly in an hour? I was in a profit and we all expected the market to keep on rallying. I was furious that they did not consult me as I would have cancelled my stop-loss.

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The reason for the sudden fall on the US markets and the JSE futures market, which was still open after the JSE closed, was the now famous “Irrational Exuberance” speech of the Federal Reserve Chairman of the US, Alan Greenspan. In the speech he expressed concern that irrational exuberance had inflated asset prices, especially share prices. He said: “… sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets… But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

The speech, by one of the most influential persons in the biggest economy in the world, sent world stock markets down. The next day the JSE opened substantially lower and futures prices fell. I was very glad that my stop-loss saved me from a big loss. That lesson taught me to always place a stop-loss when trading and to stick by it. Alan Greenspan’s speech only caused markets to decline for a short while, but his words came true when the dotcom bubble burst spectacularly in 2000.

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