Dec 3rd, 2008 at 12:12 pm
Motion Sickness
Justin Fox on our new era of volatility:
Here’s a look at some different time periods and the number of days the S&P 500 has moved up or down more than 5% during the trading day:
- 1950-2000: 27 days
- 2000-2006: 7 days
- Jan. 1-Sept. 30, 2008: 20 days
- Since Oct. 1, 2008: 22 days
I don’t think I’ve seen anyone even seriously attempt to explain why this would happen. Stock market crashes are, obviously, not unprecedented. But never before have they entailed this kind of wild, up-and-down day-to-day swinging. What’s different now?
57 Responses to “Motion Sickness”
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December 3rd, 2008 at 12:16 pm
What were the swings like 1929-1930?
December 3rd, 2008 at 12:17 pm
I wonder what happened in 2007?
December 3rd, 2008 at 12:20 pm
What were the swings like 1929-1930?
That was still the small-combo/Dixeland era, and there wasn’t much swing to speak of. Swing didn’t really take off until the “big bands” of the 1930s.
I’m always glad to be of help.
December 3rd, 2008 at 12:20 pm
What’s different now?
The invention — and by now the ubiquity — of the internet?
December 3rd, 2008 at 12:22 pm
Hmmm….seems like maybe you have large numbers of investors now who have no idea how much anything is actually worth, but are just playing the game and going with the general flow.
December 3rd, 2008 at 12:22 pm
Could these swings possibly be at least partially due to the exponentially increasing speed with which news is disseminated?
December 3rd, 2008 at 12:24 pm
Ubiquity of equity investment dilutes the expertise and professionalism of the investor class.
Basically, the majority of people investing money in the stock market don’t know what they’re doing, viewing equity investment as something like near-term gambling.
December 3rd, 2008 at 12:28 pm
What’s happened now — i.e., since Oct. 1 — is that investors have an antidepressant-resistant case of heebie jeebies. They panic at bad news, then go bargain-hunting after a steep fall in prices, and repeat the cycle. On the bright side, brokers must be raking in the bucks.
December 3rd, 2008 at 12:28 pm
who have no idea how much anything is actually worth
That’s my vote. The lack of securities transparency on banks books (some aren’t even on the books). Lack of transparency on Fed actions. They have assets on their balance sheet that they refuse to say who sold them. The changing policies of current Treasury/Fed declarations and actions. New Administration speculation. All that means people guess on a day-to-day basis.
December 3rd, 2008 at 12:28 pm
Re “What’s different now?”
————
You took a spoiled little rich boy –who had all the advantages of a wealthy upbringing — and sent him to Harvard Business School even though he had mediocre grades as an undergrad.
By middle age, he turned out to be an alcoholic and a bankrupt businessman. So you let rich men bail him out, put him in the White House as designated puppet, and you gave him the national credit card.
What the fuck did you think would happen? Al Gore warned you in 2000 but you wouldn’t listen. Remember that “fuzzy math”?
PS Oh — and this spoiled little rich boy had an older brother named Neil who buttfucked you to the tune of $1 Billion in the 1988 Savings and Loan Scandal.
A successful scam because you elected George W and Neil’s father to the Presidency in 1988 — because George H waited until 2 weeks AFTER the election to tell you about something called Savings and Loan.
Prior to the election, of course, you were focused on whether Democrat Gary Hart was fucking Donna Rice, how and how often. Because the safety of the republic depended on resolution of that issue.
December 3rd, 2008 at 12:32 pm
I’ll retract my explanation and go with Don’s. I’d forgotten about Donna Rice.
December 3rd, 2008 at 12:34 pm
I recently read that the swings in the 30’s were similar to today’s (through 37!). Related topic: http://www.dailykos.com/storyonly/2008/12/2/102214/940/743/668445
December 3rd, 2008 at 12:37 pm
No time to find the citation, but I saw an options blog recently that mentioned that index variance – sorry, volatility – went high after 1929 and stayed high for a decade. Don’t know about the 5% mark, but it sounds like a very similar pattern.
December 3rd, 2008 at 12:38 pm
More traders acting on more information without a filter to effectively talk them out of bad decisions (a broker). If I had active control of my portfolio instead of my broker, I likely would have modified my positions in some of the stocks I own like Exxon and the shell formerly known as Citigroup. But since I’d have to look up his name and number from my last statement, I’ve stood pat, which is probably the best strategy going forward since it’s pretty much impossible to game a market that doesn’t have rules anymore.
December 3rd, 2008 at 12:42 pm
What Toady said.
E-Trade alone added almost 300,000 new retail trading accounts in 2007, and I believe they were in decline even then. How many millions of amateurs do we have out there with itchy buy/sell trigger fingers?
December 3rd, 2008 at 12:45 pm
Barbara Kiviat wrote that brilliant post by the way, not me.
December 3rd, 2008 at 12:47 pm
high liquidity = low volatility
low liquidity = high volatility
December 3rd, 2008 at 12:50 pm
Heteroskedasticity is a great word and entirely appropriate for this topic.
December 3rd, 2008 at 12:52 pm
Volatility throughout the 1929-1931 period was virtually the same as today. Ignoring this period because it wasn’t “postwar” is what got us into the mess in the first place (”housing has never gone down nationally in the postwar period!”). Basically the market’s behaving exactly as it should after a major bank failure.
December 3rd, 2008 at 12:53 pm
I imagine that people are trying to recoup big losses by taking small profits at the margin, over and over.
December 3rd, 2008 at 12:54 pm
Dan Kerviak has it right. Here is what I wrote my clients earlier this summer: Neither I, nor anyone else alive today knows exactly how and when this economy and these markets will straighten themselves out. That leads to days of unfathomable pessimism followed by days of uncontrolled euphoria. I suggest we follow the lead of the smartest investors through history who have basically stuck with their strategy, showed determined discipline and have taken advantage of disruptions to add quality positions to their investments.
December 3rd, 2008 at 12:58 pm
“What’s different now?”
My guesses:
*Record amounts of leverage
*Clusterfucked financial system
*Program trading, “shadow” trading = huge buy/sell orders
*Willy nilly Fed/Treasury interventions
*Lack of transparency (SIVs, etc.)
*”Herd behavior” by big insiders
*PPT ?
And for laughs, here’s a great quote from the “Maestro”:
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”
–Greenspan 2004
December 3rd, 2008 at 1:05 pm
The internet. Information moves much faster and reaches a higher percentage of investors more quickly than in the past. Also the trading itself can be done much faster.
December 3rd, 2008 at 1:08 pm
Also a lot of trading is done by computers which buy or sell when stocks reach a certain value or change by a certain amount. This leads to a lot of feedback loops which drive prices way up or way down.
December 3rd, 2008 at 1:14 pm
Random Variation is the short answer. Different crowd, different derivatives, different outlook, different environs.
Either way, I like it. I day trade so this is literally like Christmas everyday. I heard a wonk say that this daily volatility would continue until at least February. That was music to my ears.
k1
December 3rd, 2008 at 1:20 pm
Oh yeah, the internet was invented in 1999 and really became popular in October 2008. And the internet was also around in 1930 when the market was swinging like crazy. I’m so smart!
December 3rd, 2008 at 1:24 pm
Try reading Mandelbrot and Taleb.
December 3rd, 2008 at 1:26 pm
No one knows what’s happening, and so they’re looking to the next guy to get some guidance. Since no one knows what’s happening, it only takes a few people to start panicking and going wild (either selling or buying) and everybody else, who is looking to see what other people are doing, start following suit. Once a precedent has been set and panic has ensued a few times, people start to think it is the norm and act wildly when before they would be calmer.
Of course, it is very limiting, short term thinking that is driving these actions, but, hey, it’s stock traders we’re talking about, so what do you expect?
December 3rd, 2008 at 1:28 pm
My turn to guess: Few investors and lots of traders. WHEEE!
December 3rd, 2008 at 1:38 pm
people have been told to “keep their money where it is.” So when they see a big drop, they decide that on the next big upswing they will get out, and that is exactly what is happenning. Last week, record single week up, then this week everyone figures I am going to cut my losses, huge drop on monday after a weekend to think it over. if this week ends up bad, monday next week will be a “recovery”. I think that only the really rich and investment firms can afford (ie. have enough money for enough time) to stay in this market long enough to get back above even, and everyone else is waiting for a buyer ata losing price the seller can swallow.
By the way, on many terrible days in 1929, there were simply NO BUYERS to even set a price on many stocks, as everyone was getting margin calls and being forced to sell.
December 3rd, 2008 at 1:44 pm
As comments #23 and #25 point out, the most likely culprit for increased market volatility is the huge amount of “program” or electronic trading.
December 3rd, 2008 at 2:05 pm
The idler gives good advice.
In physics, there’s what’s known as the fluctuation-dissipation theorem. The first example of this theorem was discovered by Einstein in 1905. One of the consequences of this theorem is that unstable systems — those liable to large irreversible moves — have bigger random fluctuations.
December 3rd, 2008 at 2:32 pm
I’d be willing to bet that the vast majority of volume of trades is institutional investors and fund managers. Individuals trading individual stocks probably account for a very small percentage of trades on any given day. No, I don’t have a source for this. I’m going with my gut.
December 3rd, 2008 at 2:47 pm
I would think it would be obvious, especially to you all. We’ve shifted from an economy based on profit and loss, to an economy based on management-by-elite (Paulson, Bernake, etc).
Instead of worrying about whether companies are healthy or not, investors worry about what Paulson or Bernake says in their latest pronouncement, about who will be saved by government, and who will be left to die.
Investors scrutinize the words of our economic overlords, and attempt to seek trends and generalizations that indicate which sectors of the economy will be nationalized, which will be taxed and which will be bailed (based on the perceived political pull of the lobbyists hired by the sector’s CEOs, and the rough polling of the american people)
Welcome to the age of Pull! Where it no longer matters how good you are at what you do, or how much effort you put into your company. The only thing that matters today is how much leverage you have with the US Congress.
December 3rd, 2008 at 2:48 pm
Don,
Wasn’t Donna Rice 1984? 1988 was Willie Horton and Dukakis looking silly in a tank.
December 3rd, 2008 at 3:05 pm
One of the drivers is the increased use of leveraged ETF’s, namely the ultra longs and shorts who seek out double inverse performance, as well triple ultras just recently introduced. They use swaps and, as a result, one is able to initiate large market swings with relatively little amount of money…As more and more investors are weary of investing in individual stocks, these ultras have become increasingly become the trading vehicle of choice.
December 3rd, 2008 at 4:20 pm
There’s an idea gaining steam in the scientific literature that ecological systems exhibit increased variance when they are close to a tipping point (related technical terms include thresholds, regime shifts, and state transitions) that separates two different equilibria or trajectories. These alternative states are each self-reinforcing, so the idea is that near these tipping points the systems is simultaneously being pulled by two different attractors. Given the similar interconnectedness etc. that exists in ECOlogical and ECOnomic systems (from the greek oikos=home), there’s every reason to believe that similar dynamics might be at play here. Not particularly encouraging regarding our near-term economic prospects.
December 3rd, 2008 at 5:06 pm
Re eric k’s comment “Wasn’t Donna Rice 1984? 1988 was Willie Horton and Dukakis looking silly in a tank.”
———–
Nah, Donna Rice was in 1988. Remember the yacht “Monkey Business”? –see http://en.wikipedia.org/wiki/Gary_Hart#1988_presidential_campaign_and_the_Donna_Rice_affair
Dukakis took over after Gary Hart had to drop out — and promptly threw the election to George H Bush with a stupid shit stunt in a tank. See http://en.wikipedia.org/wiki/Image:Michael_Dukakis_in_tank.jpg
Of course, the Democrats also utterly FAILED in their job of oversight — so that after he was elected, George H Bush informed us that he did know who Gary Hart was screwing –but he was about to sodomized the taxpayers to the tune of $300 Billion to fix something called the “Savings and Loan Scandal”.
Note that the Savings and Loan fuckup had occurred on Reagan and George H’s watch but George H somehow forgot to tell us about it during the campaign. The Democrats and News Media , of course, didn’t have a clue. At least, that’s their story and they’re sticking to it.
December 3rd, 2008 at 7:29 pm
Uncertainty about the validity of information.
December 4th, 2008 at 1:06 am
Sawtoothing
I thought that the market has long been observed to make wild swings up and down, to sawtooth, as a preliminary to any broad and sustained move, either up or down. Two guesses whether the saw-toothing we’re seeing now presages an up vs a down long-term move, and your first guess doesn’t count if you said “up”.
Of course, this begs the question. If we’re not just talking about why we’re seeing so many extreme movements now, but we’re saying that up and down extremes close together are a general feature of the period just before a major sustained move, we haven’t disposed of the question, we’ve just generalized it. Why does the stock market have this tendency to sawtooth before it finally makes a definitive move in one direction or the other? I have always attributed it to the fact that the exchanges are secondary markets in which market valuations are only weakly tied to any sort of underlying or inherent value. But people making buy or sell decisions have some notion that the prices they should buy or sell at have some relation to the health of the corporation issuing the stock, so they start to react to potential future down or upturns in specific corporate, or general economic, health, by moving their prices in that direction. But after a big move up or down, the market valuation dynamic kicks in to counteract the initial move, as other actors, not having any firm idea of how much to discount or upgrade the price of stocks based on the underlying values projections, revert to the market valuation impulse to buy at what seems a tempting new low, or sell at the tempting new high. So the initial move up or down is replaced by a counter-move in the opposite direction, which spurs people to buy low or sell high in the opposite direction. This continues back and forth, or rather up and down, creating that sawtooth pattern, until either the buyers or sellers, whichever group is on the losing side of the bet about the future of the underlying economy, finally capitulate, and the market runs uninterruptedly up or down.
December 4th, 2008 at 10:59 am
Wow Matt, the quality of your comments section is something to behold. Ask a reasonable question, get a score of angry, seething answers about bankers.
The answer is yes, the Great Depression saw volatility of this nature. And we can expect a decent amount of it to continue for at least the next couple of months.
This information is common place in the finance community, it’s just that, as I have said before, no one has incentives to really make sure you know it.
-Steve aka an Equity Volatility Trader.
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