To state the obvious, we’re in a period of high daily volatility in the trading of stocks around the world. What I find particularly striking is that we’ve had two days recently–January 20th and yesterday–where stocks in the US made dramatic intraday shifts in direction. In both cases, heavy early selling that pushed indices down sharply was followed by a late reversal that wiped out most, or all, of the previous losses. In my experience, this rarely happens once–to say nothing of twice, and within a couple of weeks of each other.
I’ve got little clue as to why the going is so choppy. I imagine that algorithmic trading has something to do with it. Sovereign wealth fund selling may be playing a role. Investment banks reining in proprietary trading, thereby removing liquidity from the market, could be a factor, too. I don’t believe that either oil or China are much more than straws the financial media are clutching to.
Still, I find it very strange. The closest analog I can think of is the period following the collapse of the internet bubble in early 2000. But even that wasn’t that much like the present.
- The intraday reversals may be significant technical events. Sometimes, they signal market bottoms. In both recent cases, the market did bounce up off important support lines. Time will tell, especially since markets have a habit of returning to prior lows after a month or so before resuming a new direction.
- Blackrock, the largest investment manager in the US, seems to be calling into question whether daily volatility really has any significance for ordinary investors. Presumably, we all have equity investment horizons of three to five years. So what do daily ups and downs matter? This is just common sense, in my view, and harks back to traditional Wall Street beliefs. It is, however, heresy to devotees of the (wacky) academic theory of finance taught to in MBA schools.
- As a practical matter, you and I will never be able to outtrade high speed computers, or even low speed ones–or professional human traders, for that matter. We don’t have–or want–the mindset. We have lives; we aren’t interested in watching stock price feeds all day. Our main advantage over traders is that we are willing and able to take a longer investment horizon. We try to be aware of the shape of the forest, not the height and width of each individual tree.
- We can look for anomolies, though. Yesterday is a case in point. We can look for stocks that didn’t follow the herd. Issues that went down less than the market in the panicky morning selling and rose more the the average during the afternoon rebound are probably worth looking at more closely as buy candidates. The reverse is also true. Stocks we own that sold off more heavily than the average in the morning and rebounded less have got to be reexamined for whether we still want to hold them.
- It’s conceivable that high daily volatility is the new normal. Who knows. But if so, we should consider what else we can to to turn this to our advantage. More limit orders when we trade? More aggressive limits?