Volatility Scaring Investors Away

10/21/2011 6:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The recent wide swings in stocks are not characteristic of a healthy market, says MoneyShow’s Jim Jubak, who explains what he thinks it will take to get individual investors back into the game.

Volatility. You know, those big moves up in the market, those big moves down in the market, which by their very nature—by their very abruptness—can scare you. Well, volatility seems to be on a march right now.

We’ve had, for example, just to take one part of this—a good part—the Dow moved up 1,000 points between October 3 and October 11. That’s 1,000 points in roughly eight trading days.

It’s not just that move. It’s the fact that over the last few months, we’ve had an extraordinary number of two-, three-, and four-day rallies that have produced moves of 5% or more. So you get 5% up, you get a 5% down.

The overall effect may not be very marked, but we still haven’t gone really into traditional bear territory in the United States markets, but they’re back and forth: "My God, I’m up 5%. I’ll put some money in…Whoops, I’m now down."

This just scares people out of the market, puts them on the sidelines, and makes them very, very sensitive to volatility. One of the strange things that happens is that as more people get scared about volatility, and more people move out of the markets, the markets get more volatile.

For example, the big, big day, the big Columbus Day move on the Dow and the S&P was down another day of relative small volume. Well, it’s a lot easier to move stocks when the volume is small, so if you have volatility scaring people out of the market, it really tends to make the markets more volatile.

What we’d really like to see, if you’re on the long side of the market, is the bounce that started in early October extend through, say, the end of the year. What you’d really like to see is more people coming into the market chasing gains, but you’d like to see the volatility go down at the same time.

You’d like to see a more reasonable move up on a larger volume of stock so that it’s harder to get the big swings one way or another. That’s what a healthy market looks like.

Right now what we’re seeing is a market that’s driven from extremes of fear to extremes of hope and back and forth, and the volatility itself just breeds more volatility.

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