"A butterfly flapping its wings in San Fransisco may cause a tempest in Japan" (paraphraing from memory)
Chaos theory states, in very simple terms, that unexpected results can result from normal equations, because ALL of the inputs are unknown, hence the butterfly quote above.
As applied to the stockmarket, it is applied in two distinct ways
1/ That patterns may emerge where at first glance, there seemingly are none.
2/ That as all inputs into what causes prices to move cannot be known therefore are not predictable past the immediate future.
In the pure scientific sense, the application of chaos theory to finance is controversial, and perhaps erroneous, but in my view, a certain aspect of chaos theory is applicable; that is the Butterfly effect.
This could imply that one small factor in the complex world of finance could take the whole system out. For instance there is incredulous disbelief that a few problems in the subprime sector of the US mortgage market could take out the whole financial system... well it could.
What caused the crash of '87 or indeed 1929, or any of the financial calamities of the last two centuries? We can all look to some explanation after the fact, but at the time, it was butterfly wings.
A few of us here have been pointing to flapping butterfly wings for the last 2 or 3 years and while it doesn't pay to hide in a cave and do nothing, it does pay, if building something, to build to relevant cyclone codes, so that you survive if it does hit.
There are more than a few empires built of sticks out there that will fall over at the first breath of wind. Indeed, some are already falling over, and in rapidly increasing numbers.
So don't exclusively look at the fine skies, the beautiful hostess serving you drinks, your chubby midriff from feasting on the fat of the land, because the barely perceptable breeze from the butterflies wings has started to develop in a swirling wind, the barometer is dropping and there are storms on the horizon.
They might pass by, and cause no damage, but they might not.