I How and Why Volatility in Stocks Grew from 1982 through 2000 Volatility is as much a function of price as it is a function of trader expectations, trader emotion, and trading activity. These factors, along with new trading technology and low commissions, created a backdrop of increasing market volatility from 1982 through 2000. As world stock markets continued to move higher, these factors and forces combined in a unique way to foster the growth of highly speculative activity. As long as the game continued, things were good and the future looked rosy. Trading activity was brisk, and brokerage houses enjoyed a period of considerable growth. The shares of brokerage house Merrill Lynch were at $2 per share (split adjusted) in 1990. By January 2001, the stock made an all-time high of $80 per share. After the trading public got "burned" by crashing technology stocks, shares of Merrill Lynch had fallen to a low of $33 per share. Other brokerage firms also suffered in the declining market environment, as their credibility was injured by losing stock picks and various scandals involving preferential treatment of large clients. At the same time, the declining futures markets, combined with deeply discounted commissions, resulted in a consolidation of futures brokerage firms. In part, online trading helped exacerbate the decreasing commission structure of stock and futures brokerage firms. In short, both industries were suffering severely by 2002. SSFs were introduced, in part, to rescue a failing brokerage industry. I see the SSF market as the intended savior—the solution contrived to end the seemingly insoluble challenges that afflicted the investment business. I Heroes and Villains The scorecard of heroes and villains in the stock market of the late 1990s and early 2000s reads like a who's who of technology and high-profile executives. Stocks such as Brocade Communications ran up from a low of $4.12 in 1999 to a high of over $133 in October 2000, only to decline to the $12.63 level by October 2001. The price rise took 17 volatile months to achieve. The ride down initially took only 6! Internet wunderkind Inktomi (INKT) surged from a low in 1998 of about $7.68 to an irrational high of over $241 in March 2000. In June 2002, INKT was trading at $1.48 a share. Clearly, many investors who bought INKT near the top and held it were burned. But these are only two of many examples. Yes, a few notable stocks such as Krispy Kreme Doughnuts (KKD) survived the debacle. KKD rose from an initial offering price of about $7.50 a share to a high of over $46 in December 2001 without crashing. Interestingly enough, KKD offered substance (even though the doughnuts were fluffy) rather than technology. Technology was shunned because it was technology that had hurt the many investors who believed the media hype campaign that accompanied the top of the biggest bull market in history. forex investments ~ forex hedging |