A few weeks ago all of the brokers and market makers were coming to the confessional claiming that their earnings were down as a result of reduced trading and volatility in the stock market. Well, the last few weeks should have been quite a relief from the drought for Schwab (NYSE:SCH) and other brokers. Volumes on the Nasdaq and the New York Stock Exchange have surged. Perhaps more importantly, volatility has jumped, especially in the most speculative corners of the market.
The most popular gauge for market volatility is the VIX, which measures the implied volatility of the Standard & Poor's 100 companies' puts and calls. But it's not the largest companies on the market where things have obviously heated up -- it's the little guys. Everyone's looking for "the next Taser" (NASDAQ:TASR), another small company with a smaller float that can take off like a chipmunk on nitrous oxide. Well, don't.
Over the last few weeks, we've seen some companies that have moved 40, 50, 60% or more in a single day, sometimes on no news or on news of marginal importance. Tuesday, Mace (NASDAQ:MACE), which has a share float of 8 million, traded almost four times that amount as the company's stock rose almost 80%. Such rises are generally the result of a takeover or a going-private transaction, something that pegs the value of the company far higher than the market had granted it. What happened at Mace? It announced a new less-than-lethal product. Great. Wednesday it was down 16%, also on heavy volume. Absolutely nothing has changed.
But Mace isn't alone. Travelzoo (NASDAQ:TZOO) has an average trading volume over the last 10 days that equals its share count. This means that the average holding period for a Travelzoo shareholder at the moment is one day. Isotope manufacturer Isonics (NASDAQ:ISON) has traded an average of 2 1/2 times its float daily over the last 10 days. The average holding period for Isonics at the present rate? Two hours. That's simply absurd. Meanwhile, the company trades up 40% one day, down 20% the next. It leapt from $1.70 a stub on Oct. 8 to $5.50 two weeks later. Now, after a 17%-plus gain Wednesday, Isonics sits at about 35% below its high of last week. I suspect that most people trading this company have no idea what isotopes are, nor do they care.
Whereas the big movers on the markets had generally been in the 9-12% range over the last several months, routinely each day you'll find companies moving several times that amount. Wednesday, for example, aaiPharma (NASDAQ:AAII) increased in price almost 60% (admittedly on some actual good news, from an extraordinarily depressed level), Laserscope (NASDAQ:LSCP) 32%, and Microstrategy (NASDAQ:MSTR) 31%. On the downside, Israeli motion control company ACS-Tech 80 (NASDAQ:ACSEF) dropped 30% on the news of a weaker fourth quarter.
There is really nothing fundamental that suggests most of these violent moves are appropriate. The last time we saw an extended period of time where the most speculative companies on the market acted like this was just before the meltdown happened in 2000.
All I'm saying is that if the big moves up and down give you the impression that there is easy money floating around out there, put it out of your head. This is rank speculation, plain and simple, and a great number of people who feel pretty smart at this moment are going to get mauled when the carousel stops.
Bill Mann owns none of the companies mentioned in this story. He does think that the brokers are a little interesting, though. For true hidden gems, not traders' playthings, consider a free trial to the Motley Fool's Hidden Gems newsletter .
