Reasons for daily stock market fluctuations?

[Joe Frickin' Friday]

as of 10 AM this morning, the Dow is down about 4 percent. The headline blurb on Yahoo Finance reads:

 

Dow Plunges 300 on Fears of Deep Recession

Wall Street tumbled again Wednesday as investors again shifted their focus away from improving credit markets and fixated on worrisome corporate earnings that are raising fears of a deep and painful recession.

 

Pretty much every day (sometimes every couple of hours) they seem to come up with a reason behind the movement of the market.

 

I'm aware of Benjamin Graham's famous description of the stock market as a voting machine (in the short term) and a weighing machine (in the long term), but are the reasons behind the daily fluctuations as obvious as financial analysts make them out to be? Sometimes they are, e.g. when some sort of report delivers major bad news, or a vote fails in congress, and the market plummets for a couple of hours immediately afterward. But when the market does one thing one day, then flips the next day, what gives? Take today's headline quote above, for example. Are investors really shifting their focus away from improving credit markets and fixating on worrisome corporate earnings that are raising fears of a deep and painful recession? Why weren't they doing this yesterday? Why is everyone all of a sudden doing this at the opening bell this morning?

[smiller]

I find this very interesting as well. The fundamentals don't change that drastically over 24 hours, why the sudden and dramatic swings in sentiment? I can only guess that there are so many unknowns, and the range of possible outcomes are so large (from 'we've already found the bottom' to 'we're about to enter the second Great Depression') that investors really are changing their minds day-by-day. Plus there are a lot of important earnings reports being issued this week which only serves to increase the short-term volatility.

 

One thing that has become very clear of a result of all this is how little the professional investment community really knows about anything. Kind of scary.

 

[Lawman]

as of 10 AM this morning, the Dow is down about 4 percent. The headline blurb on Yahoo Finance reads:

 

Dow Plunges 300 on Fears of Deep Recession

Wall Street tumbled again Wednesday as investors again shifted their focus away from improving credit markets and fixated on worrisome corporate earnings that are raising fears of a deep and painful recession.

 

Pretty much every day (sometimes every couple of hours) they seem to come up with a reason behind the movement of the market.

 

I'm aware of Benjamin Graham's famous description of the stock market as a voting machine (in the short term) and a weighing machine (in the long term), but are the reasons behind the daily fluctuations as obvious as financial analysts make them out to be? Sometimes they are, e.g. when some sort of report delivers major bad news, or a vote fails in congress, and the market plummets for a couple of hours immediately afterward. But when the market does one thing one day, then flips the next day, what gives? Take today's headline quote above, for example. Are investors really shifting their focus away from improving credit markets and fixating on worrisome corporate earnings that are raising fears of a deep and painful recession? Why weren't they doing this yesterday? Why is everyone all of a sudden doing this at the opening bell this morning?

 

Mitch,

My sentiments exactly! Why didn't they tell us at yesterday's close that today's market would be nearly 400 points lower right off the bat..You just gotta laugh at this nonsense...It reminds me of the Monday morning quarterbacking after any significant police crisis incident..Truth is no one knows what the market will do short term..But people refuse to admit they just don't know something..Engineers are accustomed to separating the known from the unknown. Financialists are not.. Nothing is working in this market. Oil is down. Commodities are down. Gold is down. Stocks are down. Interest rates are down yet so are bonds. I'm presently making changes in my accounts but you can bet your butt those decisions are not being made based on what you are hearing about why today's market is down.

[Boffin]

[Quinn]

Gotta love the sound bites. Wonder how the Soccor Moms and Joe the Plumber are going with it. Hopefully, better than the Silent Majority from even further back. Seems like someone coins a phrase and everybody just jumps on it as if it were definitive proof.

 

 

[leikam]

are the reasons behind the daily fluctuations as obvious as financial analysts make them out to be?

 

But when the market does one thing one day, then flips the next day, what gives?

 

The market is simple: fear and greed. I think Seth was right when he said that there are enough unknowns that any bump in the dark or sign of light will tip the scales violently. So, yes, the market is chasing the latest news. It's not that they no longer care about debt/credit and now see earnings reports as the true indicator of where the economy is going. It's just that the latest news feels scary and it happens to be about earnings. They'll trade on credit market news or a government announcement soon enough.

 

Think about why the market is normally pretty stable. Why doesn't it gyrate up or down 5% each day?

[Twisties]

That's pretty much been my point of view for about ten years now. These rationales are just a bunch hot air.

 

Obviously no one understands the market, or there would be no market.

 

It seems to me that if you have a broker that is sufficiently influential to alter the market, or at least a single stock, and you have enough money to be first in line for his advice, then you are sitting good.

 

Right now I'd have to think the only thing floating the market at all is retirement accounts/programmed investment.

[steve.foote]

Mitch, obviously, there is no good answer to your question. But I have three random and somewhat disconnected observations which may offer a partial explaination:

 

1. Newscasters need to report in order to sell advertising for Toyota's. Whenever anything newsworthy happens, it is an opportunity to fill 24 hours of otherwise dead air with SOMETHING. ANYTHING. So, if the market is going down, they'll be talking about it. Likewise if it goes up or stays flat. The 'why' is the spin, and we all know that journalists love to spin.

 

2. There are millions of investors in the market. Millions of different priorities, needs and wants all acting independantly of each other (well, somewhat independantly). Making sense out of such a dynamic is probably well beyond our technology to comprehend.

 

3. The average investor is stoooopid. By the time the market has begun to move, saavy investors are already cashed in or out. It's the reactionaries who swing the market so far.

[smiller]

By the time the market has begun to move, saavy investors are already cashed in or out.

It's true that by the time a clear trend has been established it's too late to do anything, which is why truly savvy investors don't try to time the market.

[Lets_Play_Two]

I believe that the fluctuations now are being driven by the retail investors. The professionals are already on the sidelines waiting for the "bottom", while the average investor twitches at every negative note. Every day some "bad" (ie. emotional) news comes out a new group calls the broker and sells. The reporters need to find a way to explain this, and they have all day to fill up.

 

What is the Oracle doing? He is buying!!!

[Sp8er8er]

There is a massive deleveraging going on right now. Rules about fundamentals don't apply unless your time horizon is out far enough for this process to play itself out. Just like the real estate speculator raised the price of your house the stock speculator (read: hedge funds) raised the price of your shares. Their credit is being called so they are forced to sell their shares they bought on margin (margin call) and the ones they didn't buy on margin just to preserve cash.

 

Aubrey McClendon, who recently built Chesapeake Energy (CHK) into the country's largest natural gas producer was just met with a margin call. He was buying as late as 3 months ago- $43M worth @ $57 a share. Now he had to sell over 30,000,000 shares south of $20 when he thought they were worth more than $50 per.

 

http://finance.yahoo.com/q/it?s=CHK

 

http://www.investorvillage.com/smbd.asp?mb=2234&mn=146563&pt=msg&mid=5850957

 

http://www.fool.com/investing/value/2008/10/13/why-fools-dont-buy-on-margin.aspx?terms=chk+margin+call&vstest=search_042607_linkdefault

 

If a guy who is supposed to know more about the natural gas market than anyone can't get out of the way of a freight train then the average investor has little chance either.

 

In this market I have a hard time going to bed with any positions.

[Lawman]

Thanks for the reminder...I bought Chesapeake when McClendon did. .. not quite as much though and not on margin..

 

I agree with your take on this...

[John Ranalletta]

IMO, there are four factors in play.

• Per Bloomberg radio, hedge fund investors are pressing for redemptions. When the hedge funds sell holdings by dumping them onto the market, prices plunge which prompts more investors to redeem investments, driving prices even lower.
• Normal, recessionary market activity
• Fear. The Fed had to pump $550 billion in to support money market funds because investors are redeeming shares and moving to Treasuries for safety.
• Non hedge fund investors "the street" have lost confidence in Wall Street; and, it might take 5-7 years to rebuild it.

The first guy to drag his stuff to the curb will get the highest price. These price movements have nothing to do with the intrinsic value of the companies issuing the shares.

[Lawman]

IMO, there are four factors in play.

• Per Bloomberg radio, hedge fund investors are pressing for redemptions. When the hedge funds sell holdings by dumping them onto the market, prices plunge which prompts more investors to redeem investments, driving prices even lower.
• Normal, recessionary market activity
• Fear. The Fed had to pump $550 billion in to support money market funds because investors are redeeming shares and moving to Treasuries for safety.
• Non hedge fund investors "the street" have lost confidence in Wall Street; and, it might take 5-7 years to rebuild it.

The first guy to drag his stuff to the curb will get the highest price. These price movements have nothing to do with the intrinsic value of the companies issuing the shares.

 

Not to take issue with you because I agree but what good is having something of monetary value if no one else is willing to buy it? I'm hoping that people will be willing to buy it in a reasonable amount of time cause right now it looks like I'm the only one buying.

[John Ranalletta]

what good is having something of monetary value if no one else is willing to buy it

If nobody will buy "it", "it" has no monetary value. You and I bought stock because we assumed it was worth what we paid. That assumption was wrong. Traditional methods of valuing securities don't apply today. They will again some day, but not today. Today, stocks are like kimchi. Either bury them in the back yard for a few years or throw 'em out.

[Whip]

Today, stocks are like kimchi. Either bury them in the back yard for a few years or throw 'em out.

 

I love that statement, but you shoulda prolly told Billy to put the sharp objects away first........and take the bullets outa his guns.....cause he don't know what kimchi is?????????

 

 

 

 

ROTFLMAO

 

 

Whip

[sgendler]

I suspect a fair bit of the extreme fluctuations are the result of the poor responses of the automated trading systems which have never been put to the test with such volatile market conditions. Traders reacting to news push the market a little farther in one direction at a rate that is a little more rapid than normal, and then the automated systems kick in, trying to arbitrage their way to a 'safe' position. I'm just guessing here, since I don't know much about wall street, but I've written portfolio optimization algorithms for advertising which suffered the same kind of cascade effect when fed parameters they weren't designed for.

 

I saw somewhere that as much as 50% of all trades are placed automatically by software systems rather than people. Margin calls and stop loss orders contribute to some of that, I'm sure, but some is sure to be automated portfolio management.

[R80RTKen]

Now is the time to slowly and gently dollar cost average into companies you really like but could never afford to buy.

 

There are bargains out there.. pick a little bit of your favorite and stuff it out back with the kimchi... in a few years sell it and buy a new bike..

 

 

[John Ranalletta]

Now is the time to slowly and gently dollar cost average into companies you really like but could never afford to buy.

 

There are bargains out there.. pick a little bit of your favorite and stuff it out back with the kimchi... in a few years sell it and buy a new bike..

Your guess is as good or better than any, but I'll put my money with Nouriel Roubini. He called this situation (recession and banking blackhole two years ago).

``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said.

 

``Systemic risk has become bigger and bigger,'' Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds,'' and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.

We could see the opportunity of two lifetimes soon.

[Penforhire]

Jim Cramer (Mad Money) specifically called out a few hedge funds and "fund of fund" managers for causing the last two days' extreme movements (e.g. liquidating around 2-3 PM for next-day redemptions). Hard to believe a single hedge fund can affect the market so much but that's what he says.

[John Ranalletta]

Jim Cramer (Mad Money) specifically called out a few hedge funds and "fund of fund" managers for causing the last two days' extreme movements (e.g. liquidating around 2-3 PM for next-day redemptions). Hard to believe a single hedge fund can affect the market so much but that's what he says.

This is not "just one or two hedge funds". It's estimated that there are >7,000 hedge funds in existence. They have lost their ability to hedge investments, either short or long!! They operated on yen borrowed at near zero interest rates and now being forced to liquidate. This is going to have an especially depressing effect on foreign and emerging market stock portfolios.

 

It's not the end of the world, but right now, market futures are hitting the circuit breakers...the exit door is closing. The elephants and mice are running for the exits and the mice will get trampled. OTOH, this is exactly the desired result, i.e. a reduction of leverage - a forced sale to satisfy a margin call.

 

There's a difference between "realized" and "portfolio" losses. People who throw away there stocks today will realize their portfolio losses. Unfortunately, alternative investments are not very attractive.

 

BTW, re: Cramer, IMO following his advice is akin to being the end guy on a whipsaw machine. He's given so much bad advice, he should be indicted and others who track his recommendations aren't impressed. Booyah! Bullshit!

[Joe Frickin' Friday]

So the news this morning says foreign markets are way down. 7:55 AM EDT, and the Nikkei is down almost 10%.

 

The expectation is that NYSE will follow suit when they open for business in a couple of hours, which is to say that people believe the Dow will mostly be reacting to what foreign markets are doing.

 

What are these foreign markets reacting to that's got them so far down in the first place today????

[John Ranalletta]

Two guesses.

 

Stocks of Asian, European and emerging countries are being dumped by hedge funds and by ordinary investors because they ran up unreasonably on unfounded speculation (see housing boom in US).

 

Those countries are/will be hard hit by a global recession. Over the last 10 years, the US economic activity provided liquidity and monetary velocity (flow). Contraction of velocity, despite federal money pumps in the US is spreading globally. Today, velocity is near zero, meaning people/investors are hunkering down and holding on to what they have. Velocity creates jobs, investment, etc. Money parked in Treasuries at nearly zero return rates means zero velocity.

 

I would not worry about the banking crisis and banks' unwillingness to make loans, because nobody's making loan apps. Paradoxically, this may be the first time in recorded history that an enormous flow of funds doesn't lead to runaway inflation. Most of the money will be "saved" as will the next stimulus checks to consumers (bet on it). Consumers won't spend it, they'll save or pay off debt with it.

 

These are very interesting times.

[Joe Frickin' Friday]

Two guesses.

 

Stocks of Asian, European and emerging countries are being dumped by hedge funds and by ordinary investors because they ran up unreasonably on unfounded speculation (see housing boom in US).

 

Those countries are/will be hard hit by a global recession. Over the last 10 years, the US economic activity provided liquidity and monetary velocity (flow). Contraction of velocity, despite federal money pumps in the US is spreading globally. Today, velocity is near zero, meaning people/investors are hunkering down and holding on to what they have. Velocity creates jobs, investment, etc. Money parked in Treasuries at nearly zero return rates means zero velocity.

 

So do other countries' stock markets respond to the NYSE the same way the NYSE seems to respond to them? When Britons wake up in a few hours, are they going to see headlines about how the FTSE indices are expected to plummet because the Dow did the same a few hours ago?

 

Seems like a bizarre, positive-feedback system, virtually guaranteed to rapidly amplify any little instability.

 

These are very interesting times.

 

No doubt. Is the speed of information flow making things worse? Is this the consequence of an efficient market? I'd imagine a humungous open-air farmer's market in the third world undergoes hourly fluctuations in supply, demand, and price, but the fluctuations are damped by inefficiency, i.e. the slowness with which information spreads - perhaps particularly because the information there isn't centrally reported through some clearinghouse (like a stock exchange); all any buyer knows is the price offered by vendor in front of him, plus whatever he might happen to hear via word of mouth about vendors on the far side of the bazaar. Likewise, any given vendor can only gauge demand based on how many buyers are clammering for his goods.

[Lawman]

Okay everybody..Mystery solved. I just heard it all explained on CNN..

 

"People are selling their stocks to get their money out of the market! "

 

It seems so obvious now...

[Harry_Wilshusen]

Daily wild fluctuations don't concern me because I don't trade daily. What concerns me is medium term (5 years) and long term (10 years). Now that we babyboomers are starting to retire we be using our retirement savings to live on. Stock Certificates aren't very nutritional. So money will be pulled out of the market by us and the pension funds.

 

Add to this politicians trying to FIX things.

 

To me this doesn't look good.

 

On the bright side, my retirement adviser told me to trade in the RT for a HP2.

 

Harry

[John Ranalletta]

Seems like a bizarre, positive-feedback system, virtually guaranteed to rapidly amplify any little instability.

Uninformed, retrospective, mob behavior. When most investors got into the market because "everyone else did", guess what they'll do when everyone else leaves? That argues for one to have a contrarian approach to investing, e.g. buy straw hats in January when nobody else wants them.

 

Investors caught short today are like the frog in the pot. As the water warmed (portfolios gained value), the frog became more and more comfortable in the warming water. Trust no one with your finances. Assume nothing. Question always and remember that every trend reverts to the mean, sometimes violently.

 

The average Brit who waited until s/he woke up to check the market, missed the boat. The market was already in motion. There's always a market open somewhere whereupon any globally traded stock can be bought or sold. When I awoke at 5am today, Bloomberg radio was reporting that the Dow would likely drop enough today to trigger circuit breakers.

 

Joe Granville used a bathtub analogy for stock market crashes. When the tub is full with the drain open, though water is running out, it will look full for a while. As the level drops to a scant few inches, the bather can see the water moving fast in a whirlpool fashion at the drain. Money's been draining from this market for a long time (months). Recent activity is just the whirlpool caused by people trying to empty their portfolios. That also means the tub is near empty and the time to refill is nigh.

[R80RTKen]

There are healthy companies out there with P/E ratio's in the single digits.. When was the last time this happened?

 

 

 

 

[Lets_Play_Two]

You cannot focus on what the stock market is doing for decision making. You need a lot more data. For example today...existing home sales are up, unsold home inventory is down, average home price dropped below April 2004 level (no bubble left). The foreclosure and short sales are happening. Money and credit are starting to react again and are becoming more available at reasonable rates. The S&P as a whole is trading at about 9 times earnings. Art Cashin, a long time floor guy whose opinion I pay attention to says in his opinion the bottom is near (although he doesn't know where it is) and the recovery will be "spectacular". My own advisor began buying a little yesterday because of the single digit P/E rations. If you follow the buy high, sell low theory...now is the time to sell!!!

[motoguy128]

So is the market is near bottom, what is anticipated lag for the economy as a whole to reach bottom and begine to rebound. I would expect layoffs and unemployment to increase for at least 12 months, then turn around.

 

I'm not sure 2004 was the beginning of the real estate boom. I think it goes bakc a few more years. I don't think we're anywhere near the level of real estate corrections that are justified to balance supply and demand as well as the appropriate income to debt ratios that lenders SHOULD have been using all along. My wife's jaw dropped when we watch a show on TV with first time homebuyers, they lent someone making $50,000/yr almost $500,000 for a home. She said, at her bank, follwoing the guideline for FM,FM, she could loan that person much more than $250, maybe $300 even with an extremely high credit score.

 

[Lawman]

I hope you are right. I'm betting on it. I took one fourth of my investment portfolio (which was already light on stocks) out of the stock market one year ago next month and bought one year c.d.'s. They will all mature in three weeks. I plan to invest the entire amount in these two funds (HSTRX and HSGFX) I just gotta believe at this point the upside potential outweighs the downside risk..

[John Ranalletta]

My own advisor began buying a little yesterday because of the single digit P/E rations.

Single digit p/e ratios mean nothing. Stocks have single p/e ratios just before bankruptcy. A high p/e stock might be a better buy. What's the business case for the company?

 

 

[John Ranalletta]

I hope you are right. I'm betting on it. I took one fourth of my investment portfolio (which was already light on stocks) out of the stock market one year ago next month and bought one year c.d.'s. They will all mature in three weeks. I plan to invest the entire amount in these two funds (HSTRX and HSGFX) I just gotta believe at this point the upside potential outweighs the downside risk..

Interesting but not very exciting choices. A portfolio split 50/50 between each fund has a historical average annual return of 6.97% and Standard Deviation of 4.49%. That's cool. Forward looking return/SD however are 4.30% and 4.80%, respectively. Personally, I avoid any security where the SD exceeds the expected return.

 

Note: Both securities have short historical records

 

In case anyone's interested, the tool used to analyze this portfolio is the Quantext Portfolio Planner developed by Geoff Considine at quantext.com.

 

Hussman's weekly column at http://www.hussmanfunds.com is a must read. Hussman funds employ hedges via puts/options.

 

[Lawman]

Agreed. Exciting it is not...I'm not looking to hit a home run.

There is no one I trust more than Hussman to manage my money better to provide satisfactory return in an up market and an excellent defensive posture in a down market..I'd be interested if you know of a better reward ratio for a very low risk position..Hussman called this fiasco with Fannie Mae and Freddie Mac many months ago..He saw it coming and was well prepared..

I agree also....His commentary is a must read..