Forum Archive Index - April 2000

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Volatility: Get used to it
In the age of momentum investing, prep for lots of ups, downs and clichés
By Staff Writer Jake Ulick  April 18, 2000: 5:04 p.m. ET  
http://cnnfn.com/2000/04/18/markets/volatility/

NEW YORK (CNNfn) - What's going on in the stock market these days? Just look at 
the latest clichés.  

One day Wall Street is a roller-coaster ride. The next session is likened to a 
bungee jump. So investors better fasten those seatbelts. But not before taking 
their Dramamine.  

"It's either down or up," said Barry Hyman, chief market strategist at 
Ehrenkrantz King Nussbaum. "It's great for traders; it's noise for investors."  

All this seesawing and pendulum swinging may be overdone. But it's an apt 
description when dramatic price moves come as often as a new 52-week high -- 
followed by a fresh 52-week low.  

Consider some recent numbers:  

The Nasdaq composite index's biggest gain (April 18: 254 points) came two 
trading sessions after its largest point plunge (April 14: 355 points).  

And, sandwiched between those sessions, the index rose 217 points, its No. 2 
surge.  

 [IMAGE] The list goes on. The Nasdaq set 16 record highs in 2000, giving it a 
24 percent year-to-date gain at its peak. The index also plunged 25 percent 
last week. The 10 biggest point increases came this year; so did the 10 worst 
losses.  

And it's not just for tech stocks anymore. Four of the Dow Jones industrial 
average's biggest point surges occurred this year; so did its five steepest 
losses.  

Momentum rules  

What's going on?  

Analysts blame the wild swings on momentum trading, where shares are bought and 
sold based on anticipated price movements and not on company fundamentals like 
earnings and revenue.  

The rise of day trading, when market participants move quickly in and out of 
stocks before cashing in their position at day's end, doesn't help.  

 [IMAGE] "It has become like a casino," said Hyman, who lamented the demise of 
fundamental analysis. "I still question how many people who have bought Cisco 
Systems (CSCO: Research, Estimates) have read their report."  

The rise of herd-mentality trading comes as more and more Americans own stocks. 
At the same time, the growth of the Internet has meant greater access to more 
information of varying credibility.  

"Momentum investing has become more and more in vogue," said Terrence Gabriel, 
stock market strategist at IDEAglobal.com. "When certain stocks start to move, 
there's a tendency toward massive concentration."  

And buying stocks with borrowed money has surged. In an up market, more and 
more investors are gambling with the house's money, buying stocks they 
otherwise couldn't. In a down market, this leads to massive selling, as 
investors faced with losses must sell to meet their broker's account 
requirements.  

"We had a record number of margin calls over the weekend," Blake Darcy, chief 
executive officer at Donaldson Lufkin & Jenrette told CNN's Street Sweep 
Tuesday.  

>From bull to bear and back  

On March 10, the Nasdaq closed at 5,048, a record high. A little more than a 
month later, on April 14, it finished at 3,321. The 34 percent decline from 
peak to trough put the Nasdaq solidly in bear market territory.  

But what once took years now takes days.  

"The trends can play themselves out in 20 minutes," Gabriel said. "It happens 
all in one day."  

The increase in before-hours and after-hours trading also causes volatility. 
Stocks may get bid up before hours. Seeing this, investors swarm into shares 
during the early hours of the regular session before dumping the stock by day's 
end.  

"Once the volatility genie is out of the bottle, he's going to bounce around 
for awhile," Gabriel said.  

Ignore it (if you can)  

Long-term investors may be able shrug off this day-to-day action. Shorter-term 
ones must remain vigilant.  

For the individual investor, Ehrenkrantz King Nussbaum's Hyman recommends 
tuning volatility out. "I would try to ignore if you can," he said.  

Amid rapidly swinging markets, Hyman recommends investors stay diversified. His 
firm's model portfolio is 60 percent stocks, 25 percent bonds and 15 percent 
cash. He likes technology but is keeping it at 23 percent of his stock 
portfolio.  

Still, Hyman believes last week's Nasdaq shakeout has removed some of the most 
speculative froth from the markets -- for now.  

But just wait a few hours. Things could change. 

Copyright 2000, CNN America, INC.
ALL RIGHTS RESERVED

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