USA TODAY International Edition

Panic, emo­tions be­hind volatile Wall Street,

Emo­tions may be play­ing a ma­jor role

- By Adam Shell USA TO­DAY Business · US Stock Markets · Finance · Stocks & Markets · Investing · Wall Street · Americas Stock Markets · Financial Markets · New York City · Harrison · Iowa · United States of America · Federal Reserve System · Washington · Scott · U.S. government · Ben Bernanke · Greece · Italy · France · Berkshire Hathaway · Stacy · Nashville · Dow Jones · Cumberland, WI · Harris Bank · Dubuque, IA · Dubuque · Delphi · Delphi, Indiana · Lehman Bros Holdings · Warren Buffett · Warren · Black Monday · Wilshire Associates

NEW YORK — Plunge! Re­bound! Crash! Rally! Plunge again! That’s been the de­press­ing sto­ry­line of the stock mar­ket the past five trad­ing days, a gut-wrench­ing, con­fi­dencetest­ing, wealth-de­stroy­ing bout of volatil­ity that has put in­vestors on edge.

Wall Street has gone hay­wire again, just as it did in 2008, when stock prices swung sharply up and down like an el­e­va­tor in a sky­scraper dur­ing the morn­ing rush. Just as it did on May 6, 2010, when a “ flash crash” in­spired a short-lived Dow dive of al­most 1,000 points. And just as it did on Black Mon­day in Oc­to­ber 1987, when the Dow suf­fered a record one-day per­cent­age drop of 22.6%.

The signs of the short-cir­cuit­ing stock mar­ket are ev­i­dent in the un­usu­ally sharp price swings re­cently in the Dow Jones in­dus­trial av­er­age. The Dow plunged 520 points Wed­nes­day to 10,720— its ninth-worst point loss ever. A day ear­lier, it had soared 430 points, fol­low­ing a su­per-scary swoon of 635 points on Mon­day. The may­hem, of course, started last Thurs­day, when the blue-chip in­dex tum­bled 513 points.

The causes are many. Traders, in­vest­ment strate­gists, money man­agers and econ­o­mists

all have their the­o­ries. “Raw panic,” tops the list, says David Ko­tok, chair­man and chief in­vest­ment of­fi­cer at Cum­ber­land Ad­vi­sors.

Com­put­ers that make trades in mil­lisec­onds based on math­e­mat­i­cal mod­els are also be­ing blamed, as are ris­ing fears of a profit-crimp­ing dou­ble-dip re­ces­sion at home and a pos­si­ble bank­ing cri­sis in debt-rid­den Europe. Forced sell­ing by over­lever­aged funds is also on the list.

If your hunch is that this mega-volatil­ity is very un­usual be­hav­ior for the stock mar­ket, you are right.

“When you have 500-to 600point swings in a sin­gle day, some­thing is wrong,” says Jack Ablin, chief in­vest­ment of­fi­cer at Har­ris Pri­vate Bank. “It sug­gests emo­tions are play­ing a big fac­tor in the moves.”

In­vestors might have to get used to it, he adds.

“While we may be get­ting closer to a bot­tom, a mar­ket that is con­sid­ered fairly val­ued or cheap can get much cheaper if imag­i­na­tons run wild,” Ablin warns.

Sta­tis­tics com­piled by mar­ket re­search firm Scan­shift.com show just how ab­nor­mal — and rare— these out­size moves re­ally are. In the past three days, the Dow has suf­fered in­tra-day price move­ments of more than 5% — and those are the only three times that has hap­pened in 2011.

In con­trast, last year, there was only one day as wild. And there have been only 45 days with 5%-plus moves in to­tal since 1999. The big out­lier for volatil­ity was 2008, when the Dow had 29 daily roller-coaster rides of 5% or more.

“We are not even in the same galaxy as 2008 when it comes to volatil­ity,” says Scan­shift Chair­man Fane Loz­man.

Dam­age is grow­ing

Still, that’s no con­so­la­tion for in­vestors who have seen $ 2.2 tril­lion in stock mar­ket value go down the drain in Au­gust alone, ac­cord­ing to Wil­shire As­so­ciates.

The dam­age to the Dow is adding up. It’s been down 11 of the past 14 days, leav­ing it down 7.4% for the year and 11.7% this month. If there is a sil­ver lin­ing, it’s only down 16.3% from its April 29 high, so is still not in a bear mar­ket, de­fined as a drop of 20% or more.

“Volatil­ity,” says John Bollinger, pres­i­dent of in­vest­ment man­age­ment firm BollingerB­ands.com, “is ba­si­cally a func­tion of un­cer­tainty.”

And un­cer­tainty, which mar­kets ab­hor, is a big rea­son jit­tery in­vestors are trad­ing the mar­ket on ev­ery head­line, be it bad news or hopeful news, muscling prices up and down wildly in the process.

What’s caus­ing the sec­ond-to-sec­ond, minute-to-minute, hour-to-hour, day-to-day mood swings? A con­flu­ence of fears and events, it turns out. Here are seven rea­sons for the wild ride:

1. Fear fac­tor. Fear is driv­ing much of the sell­ing, mainly fear of more sub­stan­tial losses to come. “It’s just one’s guy’s opin­ion, but I think the mar­ket could retest the lows of March ’ 09, says Todd Har­ri­son, au­thor of The Other Side of Wall Street. ( The Dow bot­tomed out at 6547.05 on March 9, 2009; it would have to fall an­other 38.9% to reach those depths.)

Fear of losses is a self-ful­fill­ing prophecy that makes in­vestors more de­fen­sive, which sparks more sell­ing. “ Peo­ple are get­ting fed up with be­ing whip­sawed,” says Har­ri­son. “ They have fi­nan­cial­mar­ket fa­tigue.”

Lokanath Pa­tel, 68, a met­als en­gi­neer from Dubuque, Iowa, says: “ I am a lit­tle scared, but that’s the way the stock mar­ket be­haves.” Still he’s hang­ing tight, al­though he has 10% of his port­fo­lio in win­ners such as gold and sil­ver.

Oth­ers feel the same. A closely watched Wall Street fear gauge jumped 23% Wed­nes­day.

In­di­vid­ual in­vestors are ap­par­ently so fed up that they have now yanked money out of U. S. stock mu­tual funds for 15 straight weeks, in­clud­ing a $ 10.4 bil­lion net out­flow in the week end­ing Aug. 3.

2. Dou­ble-dip wor­ries. There’s a tug of war un­der­way on Wall Street be­tween those who think the econ­omy is on the verge of fall­ing back into re­ces­sion and those who think it won’t. Weak­en­ing data at home and Europe in cri­sis are a recipe for a slow­down.

And a re­ces­sion would put a dent in the pos­i­tive earn­ings story that’s been driv­ing stocks higher for two years.

“The mar­ket has changed, and the story has changed,” says Woody Dorsey, pres­i­dent of Mar­ket Semi­otics, a be­hav­ioral fi­nance fore­cast­ing firm. “The old story was QE2 ( bond buy­ing by the Fed­eral Re­serve to keep rates low) was pro­duc­ing great earn­ings, and the mar­ket was OK. The new story is QE2 has not solved the global sov­er­eign debt cri­sis. It was only mask­ing it.”

The down­side is that a weaker econ­omy could cause earn­ings growth to stall.

3. Europe un­cer­tainty. With ru­mors swirling about the health of the Euro­pean bank­ing sys­tem, and still no bold plan from Euro­pean pol­i­cy­mak­ers and cen­tral bankers to stem the po­ten­tial con­ta­gion from the eu­ro­zone’s debt woes, in­vestors are un­clear on how this cri­sis will end. Euro­pean bank stocks and stock in­dexes got crushed Wed­nes­day.

“Europe is ex­ac­er­bat­ing the volatil­ity,” says Ablin. “The fear is a down­turn in Europe could lead to a global re­ces­sion.”

4. Lack of po­lit­i­cal lead­er­ship. Af­ter the debt-ceil­ing de­ba­cle in Wash­ing­ton and the in­abil­ity of lawmakers to come up with so­lu­tions to the nation’s debt prob­lems, in­vestors have lost faith in the abil­ity of lead­ers to lead.

“The gov­ern­ment is to­tally dys­func­tional,” says Scott Black, pres­i­dent of money man­age­ment firm Del­phi Man­age­ment. “There is a lack of lead­er­ship. We don’t have a plan to get Amer­ica back on track.”

5. Pol­i­cy­mak­ers out of bul­lets. Af­ter tak­ing ex­tra­or­di­nary steps to try to get the econ­omy back on track, the Fed­eral Re­serve and U. S. gov­ern­ment have few op­tions left and lit­tle am­mu­ni­tion to jump-start the econ­omy.

This week, Fed Chair­man Ben Bernanke told in­vestors he would leave in­ter­est rates at around 0% till mid-2013 to help the mori­bund econ­omy shake its dol­drums. But he of­fered few other de­tails of how the Fed can stim­u­late the econ­omy.

“What is play­ing out is the gov­ern­ment life­guards saved Cor­po­rate Amer­ica in the first fi­nan­cial cri­sis,” says Har­ri­son, who is also founder of Minyanvill­e.com.

“Now, fi­nan­cial mar­kets are ask­ing who is go­ing to save the life­guards.”

6. Com­puter trades are desta­bi­liz­ing. With nearly 70% of stock trades now ex­e­cuted by so-called high-fre­quency traders that use su­per-smart and su­per­fast com­put­ers, the mar­ket’s sharp moves are am­pli­fied, says Ge­orge Feiger, CEO of Con­tango Cap­i­tal Ad­vi­sors.

Com­puter al­go­rithms are too fast, and can jump on trends faster than hu­mans, he says.

“This is anal­o­gous to the flash crash,” Feiger says. “We have cre­ated a mar­ket-trad­ing struc­ture which is driven by short­term math de­ci­sions that cap­i­tal­ize on quick mar­ket move­ments. Ma­chines don’t fore­cast the fu­ture of Europe.”

7. Forced sell­ing. Many big in­vestors weren’t po­si­tioned for the rapid down­ward re­ver­sal in stocks.

As a re­sult, many hedge funds and other big in­vestors that used bor­rowed money to boost re­turns are now be­ing forced to sell as­sets to raise money to meet mar­gin calls, says Bollinger. And in to­day’s com­put­er­gen­er­ated world, these forced sales are done im­me­di­ately, caus­ing sharp de­clines in as­set prices.

In short, the in­creased volatil­ity is send­ing a mes­sage that the mar­ket is un­der­go­ing a change in think­ing, says Dorsey. “It’s telling us that we have started a new down leg in the bear mar­ket. In­stead of Lehman Bros., this time it is Greece, Italy, France and U. S. fi­nan­cial as­sets.”

Time to go shop­ping?

But some money man­agers say the steep price de­clines and crazy up-and-down moves of­fer op­por­tu­ni­ties to buy stocks cheap. Now’s the time to get out your stock shop­ping list.

Feiger thinks the prob­lems in Europe will force money back into the United States, so he’s buy­ing big-cap stocks and re­source com­pa­nies. Black is buy­ing beaten-down stocks, such as CBS and War­ren Buf­fett’s Berk­shire Hath­away.

“ If I can buy good com­pa­nies at low P-Es, I will,” says Black. “ I have a three-to five-year time hori­zon, which makes buy­ing good fran­chises” a good bet.

Stacy Har­ris, 58, of Nashville, views the cor­rec­tion as a time to buy.

Her fo­cus: stocks of de­fen­sive com­pa­nies that pro­duce stuff peo­ple need no mat­ter what, such as mak­ers of toi­let tis­sue, pa­per tow­els and food. “ Def­i­nitely a buy­ing op­por­tu­nity,” she says.

Still, even Black says in­vestors should tread care­fully, for now. He says to wait and see what hap­pens in the next few days and not make any fast de­ci­sions based on the re­cent volatil­ity.

 ??  ?? How is your port­fo­lio do­ing? See the most re­cent news and press re­leases for your stocks at money. usatoday. com. Put the name or ticker sym­bol in the Quick Quote box.
How is your port­fo­lio do­ing? See the most re­cent news and press re­leases for your stocks at money. usatoday. com. Put the name or ticker sym­bol in the Quick Quote box.
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 ?? By Mario Tama, Getty Im­ages ?? Rough day: Traders work on the floor of the New York Stock Ex­change dur­ing morn­ing trad­ing on Wed­nes­day in New York.
By Mario Tama, Getty Im­ages Rough day: Traders work on the floor of the New York Stock Ex­change dur­ing morn­ing trad­ing on Wed­nes­day in New York.

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