If you think the stock market is acting a little crazy, you’ve got plenty of evidence for your diagnosis.
More than half of the trading days this year have seen a move of more than 1 percent in the close of the Standard & Poor’s 500 index, double the rate of last year and nearly five times the rate of 2006.
On Wednesday, the S&P 500 dropped 2.4 percent, after jumping 4.2 percent a day earlier. Tuesday’s rally was the biggest since at least 1990 on the day of a regularly scheduled Federal Reserve interest rate meeting, according to Bespoke Investment Group.
“I don’t remember ever seeing this many of them this close together, when you’re down a percent and then up a percent,” said Howard Silverblatt, senior index analyst at Standard & Poor’s.
“Yes, we’ve had events throughout history, but now the uncertainty of everything seems to have made each one of those more important.”
Outsized market reactions to news events have become normal. In part, the wild daily swings reflect greater participation in the stock market and the availability of short-term trading strategies using options, futures and exchange-traded funds.
But these strategies were equally available in 2006 and early 2007, when market volatility was almost nonexistent.
Typically, increased market volatility is associated with declining stock prices.
The last time market volatility accelerated was the summer of 2002, near the bottom of the Nasdaq sell-off. To the surprise of many traders, the traditional summer lull on Wall Street failed to materialize, and prices fell steadily.
“July 2002 was crazy,” recalled Bud Haslett, director of option analytics at Miller Tabak + Co. “A lot of people got crushed.”
But this year, the major market indexes have barely budged in the last two months. Nonetheless, intraday point ranges from highs to lows on the S&P 500 are greater this year than in 2002, said Silverblatt. The intraday high-low range, known as Parkinson’s volatility, reflects the wildness of each market session, not counting where the market opens or closes.
According to Fane Lozman, chairman of market monitoring service Scanshift.com, the 30-day average high-low intraday point range of the Dow Jones industrial average has doubled from March 2007, though the Dow is trading at about the same level.
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It’s a classic case of bulls fighting bears, magnified by the extraordinary tension of the news, he said.
“There are two schools out there,” Lozman said. “There are people like me who say the fundamentals are so horrible we shouldn’t be at 12,000. When we were at 12,000 two years ago, things were great. Now, it’s a living nightmare. The bears think we’re a couple of thousand points too high.
“Then you have the bulls, who don’t want to give up and are buying on dips. The bulls think we’re at a bottom.”
Moves are exaggerated by record-high prices for oil and gold, record lows in the dollar versus major currencies and record mortgage foreclosures.
“The news is radical,” Lozman said.
Haslett said market volatility is a magnet for traders, because prices of stock-related options climb enough to offer potentially generous rewards.
“There are lot of times when there is a lot of volatility in the marketplace, but you aren’t being compensated for it,” he said. Now, “you’re getting fully compensated by selling options at a higher premium, based on all the volatility.”
This week, for example, the quarterly expirations of stock-related futures and options contracts, sometimes known as triple-witching, occurs Thursday, a day early because of Good Friday.
“As you get closer to expiration, everything gets bigger in traders’ risk determinants,” Haslett said.
Silverblatt said efforts to fix problems in financial markets and the economy haven’t been as dramatic as the problems. As a result, investors remain on edge, he said.
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