When Leo Padzunas of Orland Park left his computer to work out midday Thursday, he was up $3,000 in his day-trading account. When he returned, he was down $6,000.
Padzunas, who says he got wiped out when the Nasdaq bubble burst in 2000 and made it back, is no stranger to stock market volatility. But he didn’t appreciate the flashback he experienced Thursday.
The Dow Jones industrial average posted a 119-point gain by noon and a 128-point loss in the afternoon, closing down 63.57, to 14,015.12. Padzunas was struck by the fact that a dozen positions he holds gyrated through the same saw-tooth pattern.
Apparently, momentum trading is back, for good or ill, as major stock indexes set record highs. Momentum traders, including hundreds of private hedge funds, attempt to profit by jumping onto short-term market trends.
“They all must have the same program,” he said. “These are different markets, and it’s all the same pattern. It can’t be coincidence. This is too much. I was a bystander, but I was sort of involved, too.”
Conditions for indiscriminate momentum trading have increased since stocks hit their 2007 lows in mid-August.
First, the breadth of the rally in the past eight weeks has lifted many stocks in all sectors. More than 80 percent of the Standard & Poor’s 500 stocks have been trading above their 50-day moving average, according to Bespoke Investment Group.
Such herd behavior lifts investor optimism, on the one hand, but sets the table for momentum-based strategies to buy or sell broad batches of stocks.
Second, just a handful of stocks, including Exxon Mobil, General Electric, Apple, Goldman Sachs and Google appear to be leading the changes in the S&P 500 index. Despite their widely different fundamental characteristics, they marched pretty much in lock step on Thursday.
Among closely followed stock indexes, the Nasdaq 100 index, comprising dominant Nasdaq stocks, best reflected the day’s action. According to accounts by financial wire services, a decision by a Hong Kong-based analyst for JPMorgan Chase to trim his third-quarter revenue estimate for a Chinese Internet service provider, Baidu.com, tripped the morning rally and prompted a broad cascade of selling.
It was as if traders saw the Baidu.com report and thought “Google.” Google dropped 2.6 percent in the afternoon but recovered to close down $3.39, to $622.
Other factors cited were hawkish comments by a governor of the European Central Bank, who warned that interest rates may have to increase to offset inflation, and general nervousness about third-quarter corporate financial reports.
The last time the stock market witnessed Thursday’s level of intraday volatility was Aug. 7, just before stocks reached their summer low point. Wide intraday swings were not a feature of the market in the previous rally, which peaked on July 19.
Hectic stock market behavior is nerve-racking for active investors, to be sure. But volatility has a silver lining for long-term investors. An active domestic stock market attracts speculative capital, which in recent years has switched from U.S. stocks to such alternative investments as commodities and emerging markets.
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bbarnhart@tribune.com
