Market Swings

Follow this link to a CNBC article on volatility by way of the New York Times.  {Excerpt with my highlights and a brief comment at the end.}

Market Swings Are Becoming New Standard       Published: Monday, 12 Sep 2011 10:59 AM ET  

 By: Louise Story and Graham Bowley

The stock market just can’t seem to make up its mind.  Day after day, stocks swing sharply by hundreds of points. Last week they tumbled 3 percent in the first 90 minutes of trading on Tuesday morning, then on Wednesday closed nearly 3 percent higher and dropped almost 3 percent on Friday. All of this on the heels of unusual back-to-back 4 percent leaps and dives in one week in August....All of this anxiety has caused experts to ask whether there are new forces at work in the stock market that make trading permanently more erratic.  In fact, big price moves are more common than they used to be.

It has become more likely for stock prices to make large swings — on the order of 3 percent or 4 percent — than it has been in any other time in recent stock market history, according to an analysis by The New York Times of price changes in the Standard & Poor’s 500-stock market index since 1962.

Some experts see volatility as a problem because it can scare investors away from the markets, make companies reluctant to go public and undermine confidence in the economy, causing further drops in shares. But another viewpoint is that stocks are rightly volatile now because there is so much uncertainty about where the economy is heading — and canny investors could profit from the big swings, or simply sit them out until the market eventually finds equilibrium....

So what’s causing the rise in the big bounces?  It’s hard to know for sure, but market analysts point to new types of souped-up computerized trading and extraordinary global economic turmoil — from protests over a second bailout for Greece to the downgrade of United States debt.  It is also possible that stocks simply move faster today because of the quicker pace of news and trading, and so drops and surges in prices that might have been spread over days in past times are now condensed within hours......

.....The Times looked at two sorts of historical data — the closing prices of the S.& P. 500-stock index as well as the highest and lowest points the index reached during each trading day. Both measures, from 1962 through the end of this August, painted similar pictures of the market — it rises and falls more now in greater size.

Since the start of this century, The Times found, price fluctuations of 4 percent or more during intraday sessions have occurred nearly six times more than they did on average in the four decades leading up to 2000. The price swings today may feel even more notable because the 1990s represented a relatively calm time for trading. In contrast, price fluctuations of 1 percent and more during intraday trading were more common in the 1970s and 1980s.....

...Some analysts shrug off the big swings, saying all that matters is where prices land in the longer run, not each day. After all, the S.& P. 500 index is roughly where it was a year ago and, after the roller coaster of August, finished less than 6 percent down....."The best thing people could have done last month is nothing,” said Alec Young, an equity strategist at Standard & Poor’s Equity Research. “We don’t think that it’s a smart way to manage to be taking the temperature every day because you’ll be trading your portfolio till the cows come home.”

And volatility may not herald dips in prices — a study by Sam Stovall, a strategist at S.& P. Equity Research, found that markets since 1950 have typically been calm just before the highest consecutive price declines. But, he found, volatility goes up after prices start going down and the markets can remain nervous while prices recover.  Some longtime market observers attribute the skittishness to aftershocks of the 2008 financial crisis.“When there is uncertainty in the world, there is uncertainty in the market,” said James J. Angel, a professor of finance at Georgetown University. “After a big shock, it takes years for the markets to settle down.”

*Long ETFs related to the S&P 500 in client and personal accounts.

My comment:  While markets are more volatile in the short run, I believe that for most individual investors the best approach is to continue to take a longer term perspective.  This can give you the ability to use volatility opportunistically to add to positions at lower prices than you might have seen in an earlier period.  For all the noise over stock prices in the past month or so, once the initial drop occurred at the beginning of August, stocks have traded essentially flat.  There are also ways to stop the stomach churning plunges if the SEC would be willing to bring back a circuit breaker approach to the downside.  A simple method would be to bring back the uptick rule when markets have declined be a certain percentage {maybe a 2% decline} on any given day.