Extreme Volatility

Extreme Volatility

Why is the stock market falling or rising 5% and 10% in a day over and over? Is it panic selling?

Yes and no. Some people are selling because they believe the economy is going into free fall and corporate profits will fall a lot. Others are selling because it is now just about certain that we will have some sort of recession. Still others are wanting to sit on the sidelines because there is so much uncertainty as to severity and time. Some are selling because they are trying to protect what they have.

Computer Selling

But others are selling because computer algorithms tell them to sell when selling is heavy and to buy when buying is heavy. These sellers have lots of money to work with and they are making volatility worse, much worse.

Now, computer-generated heavy selling is as old as the 1987 drop in the market. Back then, they called it portfolio insurance and it didn’t protect anyone, just the opposite. But today, an incredible amount of the volume on the stock exchange is computer-driven.

Consider this. Trading volume on Black Monday, 1987 was 604 million shares, a record-shattering number. In 2018, the average daily trading volume was 547 billion shares, nearly 1,000 times the volume. Meanwhile, the U.S. population is 33% higher. You tell me how much computers dominate Wall St. Just remember, computers don’t write their own programs, and what the traders behind these programs are often trying to is profit very, very short-term, sometimes even in milliseconds.

Opportunistic Buying

Thank God, there are still sizable investors like mutual funds that still invest long-term. Warren Buffet is still making money and not by the millisecond, and you can place a high-odds bet that he is buying now because that’s been his strategy – buy when the market is down. Good strategy.

If you’re already fully invested, consider replacing some positions with others that might have more potential because they’ve been oversold. Think about oil companies, home builders, airlines, cruise lines, REITS, health care, banks and various other industries that have some quality stocks on sale for 50-80% off. Be careful to buy high quality businesses with solid financials. Some that had so-so dividends have terrific dividend yields now that their stocks have dropped. I make no specific recommendations online, just my thoughts as someone who’s been around awhile.

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