A Glimpse of Market Panic

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Reuters blogger Felix Salmon posted an interesting picture yesterday. It shows the correlation among S&P 500 stocks, which recently hit the highest point in at least 30 years -- higher than the crash of 1987 and higher than the 2008-2009 market meltdown.

In English, stocks are moving in the same direction more than ever before. Either everything is going up or everything is going down. Aug. 8 was the first time in 15 years that every stock in the S&P 500 closed down. Even in the most chaotic days of the 2008 financial crisis, a few stocks managed to eke out a gain. And even during the most jubilant days of the 1999 stock bubble, a few names performed poorly. Not lately. Daily moves have been an all-or-nothing game.

This points to two things. One is a general sense of panic. There's very little rationality in today's stock moves. Rather than a cool, calm analysis, whatever is moving stocks seems to be operating with an attitude of "get me in now or get me out now." If we are heading into a recession, cyclical companies like General Motors (NYSE: GM  ) or Alcoa (NYSE: AA  ) would probably be dinged hard. But would Google (Nasdaq: GOOG  ) ? Or Amazon (Nasdaq: AMZN  ) ? Unlikely. Both are being pushed by the tides of whichever way the market is moving. It's an emotional reaction that has little to do with what the stock market is supposed to reflect -- the collective estimate of business values.

That's one explanation. Another is that what's moving the market is the opposite of emotional -- programmed computers following algorithms. According to Gary Wedbush of Wedbush Securities, high-frequency computer trading has made up 75% of total stock market volume this month. These programs don't care about discounted cash flows, innovation, or good management. They care about buying and selling faster than the other programs. There's very little public information on high-frequency trading, but it's nearly certain that they exacerbate market moves in either direction -- deeper down days and bigger up days.

In either case, it's safe to say that there's a good amount of madness in today's market. Frankly, that's a good thing. The best opportunities come from exploiting those who are freaking out or those who have a different time frame than you. As Ben Graham says, "In the short run, the market is a voting machine, and in the long run, it is a weighing machine." That's as true today as it's ever been.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of General Motors, Google, and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2011, at 12:39 PM, wildnatives wrote:

    If computer programs following algorithms are causing this wild swings then I think somebody with some clout. The management of the Motley Fool? or the collective members? should be sending strong messages to people in power (the president, the people who theoretically provide oversight to the stock market) to reign some of this in.

    The folks who belong to the Motley Fool or anyone who knows enough to play the stock market game well are making money BUT the general public and other individuals who are relying on brokers or themselves are losing money and in some cases their retirement, savings or the rent.

    It is criminal and unnecessary!!

    I have learned to play this game marginally well over the last 30 years so on the average I don't lose money and I think this whole thing is fun and relaxing but just like casinos, I think the "government" or someone has a certain responsibility to protect people. Also the wider the gap between rich and poor the more chance of riots, violence, etc. not to mention to sheer inhumanity of allowing part of your population to become homeless!


    Hope Stanton

  • Report this Comment On August 25, 2011, at 1:25 PM, jimmy4040 wrote:

    This column makes no sense. It's like saying even though jet planes have certainly changed things. Over the long term, propellor driven aircraft have no peer for reliability.

  • Report this Comment On August 25, 2011, at 1:28 PM, cmfhousel wrote:

    ^ You lost me.

  • Report this Comment On August 25, 2011, at 2:01 PM, rovingartisan wrote:

    In my various web surfing sessions I have read about a group of nurses in the USA who are campaigning for an International Financial Transaction Tax. (Notice how little press they are getting folks?)

    This would be a small tax on the trading of all stocks, bonds, and derivatives. The "average investor" would pay pennies. The high frequency traders would pay in proportion to the number of their trades. No volume discounts!

    I have been meaning to ask for opinions from Motley Fools about this. I want some well-followed financial journalists to be discussing the idea. Perhaps you, Mr. Housel. Thanks.

  • Report this Comment On August 25, 2011, at 5:01 PM, PSU69 wrote:

    A Glimpse. OK. Lacking data I call it more or a glance.

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