Stock Market Volatility
SWINGS, BUBBLES, AND CRASHES
Price ticks drive the wild volatility that plagues contemporary stock markets. Momentum traders and sector rotators are both victims and transmitters of Q fever. The disease reaches epidemic proportions when the crowd follows the "indelibly indicated trend," in the sarcastic words of Fred Schwed from his classic work Where Are the Customers' Yachts? referring to the illusion that patterns predictably persist.
Average stock prices swing by 50% every year, while underlying business value is far more stable. Share turnover is enormous. The number of shares traded compared to the total shares outstanding spiked from 42% to 78% on the New York Stock Exchange between 1982 and 1999 and from 88% to 221% on the Nasdaq between 1990 and 1999. 3 Prices on particular stocks rise sharply and fall furiously within days and weeks without any link to underlying business values.
Speculation rages, and the speed of price fluctuation has multiplied dramatically compared to previous decades. Stock market volatility has increased roughly in proportion to the dramatic increase in information—both real and imagined—that is readily available. Getting in before the rise and out before the fall has become the day trader's mantra, one that reveals not only the presence of Mr. Stock Market but the existence of his coconspirators by the thousands.
Roller coaster rides in stock investing levels have been known throughout the history of organized stock market exchanges, but these rides took major indexes either up or down together. A quite different trail was blazed in the late 1990s and early 2000s as the Dow Jones average of leading industrial companies went one way and the Nasdaq average of more technology-oriented or younger companies went another.
Frothy new economy devotees bid up the new stock trading and tech stocks to wild heights compared to their pathetic or negative earnings while eschewing the stodgy old economy stocks that continued to generate steady earnings increases. The new giddiness subsided, and the Dow surged while the Nasdaq slumped. But then one recovered while the other dropped. Topsy-turvy is the only description for this wild world.
Anyone seeking to divine some deep logic in these flip-flopping patterns, however, could stop looking on April 14, 2000, when the indexes plunged together, the Dow by 6% and the Nasdaq by 10%. Then both rebounded the next trading day, with the Dow climbing back nearly 3% and the Nasdaq moving back up 6.6% (and the day after that experiencing up pumps of nearly 2% and over 7%, respectively) .
No deep logic explains these swoons or this pricing divergence, and all you can really conclude is that Mr. Market was being his (un)usual self. Staggering as these data are, consider too that in the first quarter of 2000, the Nasdaq suffered four declines of 10% or more and then in each case rebounded. In April 2000 alone it recorded two jumps that were its largest in history and three drops that were its largest in history. In the late 1990s and early 2000s, Dow busts were equally commonplace, as other drops exceeding 3% show (see Table 1—1).
forex investments ~ forex hedging
stock investment ~ forex day trading
free stock trade ~ forex course
stock investment ~ managed forex
The Dow busts of August 1998 were particularly potent: They wiped out all the gains the Dow had made during that year. So was the March 2000 bust: It set the Dow back to where it had been about a year earlier.If you prefer to focus on Mr. Market's euphoria, take the bursts
Table 1-1. Dow Busts
Point
Percent
Date
Close
Change
Change
October 27, 1997
7,161.15
-554.26
-7.18
August 4, 1998
8,487.31
-299.43
-3.41
August 27, 1998
8,165.99
-357.36
-4.19
August 31, 1998
7,539.07
-512.61
-6.37
January 4, 2000
10,997.93
-359.58
-3.17
March 7, 2000
9,796.03
-374.47
-3.68
Mr. Market's Bipolar Disorder Table 1-2. Dow Bursts
Point
Percent
Date
Close
Change
Change
September 2, 1997
7,879.78
257.36
3.38
October 28, 1997
7,498.32
337.17
4.71
September 1, 1998
7,827.43
288.36
3.82
September 8, 1998
8,020.78
380.53
4.98
September 23, 1998
8,154.41
257.21
3.26
October 15, 1998
8,299.36
330.58
4.15
March 15, 2000
10,131.41
320.17
3.26
March 16, 2000
10,630.60
499.19
4.93
in the Dow exceeding 3% that occurred in the late 1990s and early 2000s (see Table 1-2).
