The market has handed investors some nice, consistent returns over the long run, but in the short term, it can often be as unpredictable as an episode of The Real World. In a pair of articles on using market statistics to make money, I explored the market's so-called "fat tail" distribution -- the tendency of stocks to make huge moves that seem extremely statistically improbable. Since then, I've been following "5-sigma moves," or one-day price moves that are five standard deviations or more from a stock's average one-day change.

Keep in mind that we're looking at the price change relative to the stock's historical volatility, and not just the same old jittery "most active" stocks. So even though stocks like WebEx, Trina Solar, and Pre-Paid Legal saw some big movement last week, you're not going to see them on this list because of their higher average volatility.

Here's a taste of the 5-sigmas from the past week:

Stock

Date

Change

Sigmas

Accredited Home Lenders (NASDAQ:LEND)

3/13/07

(65.2%)

16.4

Newcastle Investment (NYSE:NCT)

3/13/07

(10.5%)

9.8

NovaStar Financial (NYSE:NFI)

3/15/07

23.2%

7.1

Fremont General (NYSE:FMT)

3/16/07

20.3%

7.0

American Oriental Bioengineering (NYSE:AOB)

3/13/07

(25.9%)

5.5

Sources: Yahoo! Finance, author's analysis.

Subprime volatility
In a very subprime edition of the 5-Sigma Report, I've managed to work in four companies involved in the subprime market that are getting tossed around like rag dolls. It's especially interesting that now, after a steep drop-off, these stocks are spiking in both directions. Accredited, for instance, had a particularly crazy week last week, with three other 5-sigma moves in addition to the one listed above. The stock fell 28% on Monday, rose 52% on Wednesday, and picked up another 56% on Thursday.

Last week, I suggested that the upward spikes could be signs of dumpster-divers finding opportunity amid the wreckage of the subprime lenders. Now that everyone is pretty uniformly bearish on subprime, it could be prime time for savvy investors out there to figure out how much value the loan portfolios have, and what kind of action they could expect to see from buyout offers. Admittedly, it could just as easily be speculators blindly betting on a dead cat bounce after a long fall.

News from the front lines
Accredited announced in a press release last Monday that it is examining strategic options for raising money to help it keep its head above water. While the release was not specific about funding sources, it did mention that Accredited has paid $190 million in margin calls, two-thirds of that since Feb. 15. That doesn't sound terribly promising, and it suggests to me that the dominoes may have only begun to fall.

Meanwhile, Fremont reiterated that it would not be able to file its 10-K on time, as it continues to trudge through accounting related to its recently closed subprime loan operations. Currently, the company is working with Credit Suisse (NYSE:CS) to sell its subprime arm. CS has also extended a $1 billion line of credit to Fremont to give it some cushion as it works through the sale.

NovaStar, which released its 10-K earlier this month, announced year-end bonuses last week. Although total compensation on the whole (as shown in the company's preliminary proxy) was noticeably down versus 2005, three executives took home more than $1 million in total compensation. More recent news came from NovaStar yesterday, when it announced that it will be laying off 17% of its workforce.

And to finish, we come to Newcastle, the investment fund managed by Fortress (NYSE:FIG) that I looked at last week. After issuing $50 million in preferred stock, Newcastle announced on Friday that it is buying a block of 7,300 subprime residential loans for $1.7 billion. Preliminary details from the pool indicate that the average FICO score for these loans was 644, 74% are adjustable-rate, and 41% are backed by homes in Florida or California. Yikes!

While on its face this could seem like a foolish (little "f") move, it will really boil down to what kind of a discount Newcastle is getting, and how accurate its default assumptions are. With some subprime lenders careening toward a liquidity crunch, I definitely see the potential for Newcastle to have picked up a Foolish (big "F") bargain. Since default storm clouds seem to be continuing to collect in mortgageland, I doubt this is the last opportunistic purchase we'll see in the market.

Read up on some more Foolish coverage of subprime:

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Fool contributor Matt Koppenheffer enjoys his weekly statistical rendezvous even more than he likes watching the crazies duke it out on The Real World. He does not own shares of any of the companies mentioned. The Fool's disclosure policy rocks the Casbah, cat box, and cash box all at the same time.