Not Your Father's Volatility

In the past, the kind of volatility we have seen over the last weeks signaled bottoms, crashes, reaction to war and terrorism, and the like. The frequency, speed, and psychology of the recent series of plunges are now getting much harder for all of us to interpret (and impossible for technicians). In fact, it has become a fool's folly to predict and interpret downticks and upticks in the market. Something else is going on.

Heavy selling and heavy buying have been the signals in the past of a rally and a return to moderate movements. We have seen such surges both ways in the past weeks. In fact, it has been happening once or twice a week. We have never before seen this kind of volatility. E.S. Browning in the Wall Street Journal in his article entitled "New Rules for Picking a Bottom" wrestles with what all this means -- and how what is happening now is unlike anything we have seen in the past. Quoting others, he suggests that “…market volatility could be due to the growing role of hedge funds and other fast-trading investment vehicles, which on some days account for 40% of trading or more.” The argument, which makes a lot of sense, is that these huge hedge funds -- exercising instantaneous computer trading of millions of shares of stocks or ETFs (baskets of stocks) -- can change the course of a day’s decline or rise without reflecting any market sentiment whatsoever. This, combined with the SEC’s elimination of a rule restricting short selling, can change fortunes and market realities and take away the roles of ordinary investors in market. His article is well worth reading.

http://online.wsj.com/article/SB118937309413321829.html?mod=hps_us_whats_news

These are new times. They are more risky and more unpredictable. And most important, they are beyond the control of most investors.