Investors endure hairpin turns
Those stats describe Coney Island's famous vertigo-inducing Cyclone roller coaster. But it could just as easily describe the hair-raising ride that Wall Street investors have been on this year.
If you think the stock market has experienced more wild ups and downs than normal lately, you're right. The broad market hasn't seen such wide price swings in 70 years, says Howard Silverblatt, senior index analyst at Standard & Poor's.
Exactly how wild has the ride been in a topsy-turvy market where volatility is exploding?
So far this year, the S&P 500 stock index has had daily changes of at least one 1 percent more than half the time - 53 percent to be exact. The large-company index hasn't seen volatility that high since 1938.
Blue-chip stocks also have been jumpy. The average intraday price range of the Dow Jones industrials has mushroomed to 264 points, closing in on the all-time record of 292 points in August 2002, says Scanshift.com, a research firm. The past three sessions, the Dow has soared 420 points, plunged 293 points and rallied 262 points. Scanshift Chairman Fane Lozman sums up the situation this way: "One day, the market is ecstatic. The next day, it wants to kill itself."
Blame the volatility on the high level of uncertainty caused by the financial crisis and housing-related economic turbulence, says Silverblatt. It's not every day that a major Wall Street investment bank such as Bear Stearns has to be rescued by a rival firm with the help of the federal government.
What does all this volatility mean? Does it offer insights into where the market is headed next?
Very often, sharp price swings signal an inflection point for stocks, says Ken Tower, chief market strategist at Covered Bridge Tactical.
Tower says that in periods of extreme uncertainty, big up days are rare and often occur near market bottoms. What's more, these big days "tend to occur in clusters" - such as the Dow's two 400-point rallies in the past eight sessions - and have also tended to occur at market bottoms. Cluster rallies were evident in October 1974 at the end of a two-year bear market, after the 1987 stock market crash and at the market bottom in October 2002. "Investors with a three-to-five-year time horizon should view this current market turmoil as a bullish signal" Tower says.
But Lozman notes that in 2002, the Dow fell 17 percent more before bottoming after price volatility peaked. While big volatility could signal a bottom, it's difficult to time precisely. And there were fewer risks in October 2002. "Back then, oil was cheap, there were no foreclosures, gold was a few hundred bucks cheaper, and the dollar was much stronger," says Lozman. It's too early to pick a bottom, he adds.
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