What to Make of Thursday’s Volatility

May 10, 2010by Hoy Grimm0

Was the nearly 1,000 point decline in the Dow really about Greece? Let’s look at some trading data to make sense of it all. As the market bottomed around 2:47 today I compiled a list of Dow components and their individual contribution to the Industrial Average. As the chart below shows, five stocks (HPQ, BA, IBM, MMM and P&G) accounted for roughly 500 down points on the Dow alone. Out of these, the action in Proctor and Gamble is the most peculiar. From an opening price of $61.91 per share, it reached an intraday low of $39.37 at 2:48 for a decline of 36%. The stock recovered to close at 60.71 for a modest 2% decline on the day. Do you think the fundamentals of the company changed that dramatically in less than two hours? Did the situation in Greece change that much? 

Our Thoughts

On this record day, allow us to make an observation. This wasn’t rational trading behavior. Not on the part of individuals or institutional traders. In fact, how can a market comprised of irrational, emotional participants who eagerly trade on emotions instead of facts be considered “efficient” simply by aggregating all of the individual, irrational actions together? I’m not the first to offer this observation but in my opinion, May 6th, 2010 puts another nail in the coffin of the “efficient market theory”.

Economist John Maynard Keynes is attributed with the observation that, “The market can stay irrational longer than you can stay solvent.” Today was an opportunity for individual investors to keep their emotions in check and in doing so, outsmart the proprietary trading gurus at Goldman Sachs who were trading at warp speed this afternoon to no avail. When trading volumes reached their zenith this afternoon more than 1 million trades were dropping every second. Those weren’t humans entering all those trades. That’s faster than our teenager can text message.

Looking Forward

In a bear market traders sell the rallies and in bull markets they buy the dips. At this point we have a compelling question before us: Are the last few days the end of a bear market rally that should have been sold or is this a dip at the early stages of a new bull market that should be bought? The answer won’t come at a singular point in time but will become clear over time. Friday’s employment number will provide us with another piece to finish the economic puzzle. Should the Commerce Department release data the shows significant improvement in hours worked and hourly wages, the market will shrug of the Greek tragedy and look on today’s trading volatility as a comedy of errors. In closing, we find further irony in the fact that today was also the National Day of Prayer. As long as brokers remain faithful to their black-box trading algorithms there will be prayer on Wall Street. Maybe God has a wicked sense of humor. Hoy Grimm Managing Partner, LeConte Wealth Management, LLC. Dow Jones Industrial Average Components ranked by their intraday decline and contribution to the Average

Company Symbol Open Low Time Dow Effect  
Alcoa AA 12.34 11.25 2:48 -8.23766028  
Pfizer PFE 17.16 15.85 2:47 -9.90030731  
AT&T T 25.71 24.04 2:47 -12.6210024  
Microsoft MSFT 29.59 27.91 2:47 -12.6965773  
Bank of America BAC 17.48 15.5 2:47 -14.9638233  
Travelers TRV 50.58 48.55 2:46 -15.3416976  
Verizon Comm VZ 28.61 26.5 2:46 -15.9462965  
Kraft Foods KFT 29.63 27.49 2:48 -16.1730211  
Wal-Mart WMT 54.35 52.2 2:46 -16.248596  
Intel INTC 22.15 19.91 2:47 -16.9287697  
Coca-Cola KO 53.67 51.25 2:48 -18.2891173  
General Electric GE 18 15.57 2:47 -18.3646922  
The Home Depot HD 34.92 32.41 2:46 -18.9692911  
McDonald’s MCD 70.45 67.5 2:47 -22.2945852  
Cisco Systems CSCO 26.4 23.23 2:46 -23.9572322  
JPMorgan Chase JPM 42.63 39.29 2:46 -25.2420049  
DuPont DD 37.7 33.97 2:47 -28.1894246  
American Express AXP 44.35 40.2 2:46 -31.3635689  
Walt Disney DIS 35.16 31 2:46 -31.4391438  
Merck MRK 35.41 30.78 2:47 -34.9911625  
Johnson & Johnson JNJ 65.04 60.03 2:47 -37.8630073  
Caterpillar CAT 65.85 59.23 2:47 -50.0305606  
Chevron Corporation CVX 79.41 72.27 2:48 -53.9604536  
ExxonMobil XOM 65.79 58.46 2:47 -55.396376  
United Technologies UTX 73.05 65.17 2:47 -59.5529936  
Hewlett-Packard HPQ 50.53 42 2:47 -64.4653598  
Boeing BA 70.66 62 2:46 -65.447833  
IBM IBM 126.29 116.03 2:47 -77.5398114  
3M MMM 86.06 69.31 2:47 -126.587899  
Procter & Gamble PG 61.91 39.37 2:48 -170.345746  

*The total decline in the DJIA from HPQ, BA, IBM, MMM and P&G was -504 points.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The Barclays Capital U.S. Credit Index is comprised of the U.S. Corporate Index and the non-native currency sub-component of the U.S. Government-Related Index. It includes publicly issued U.S. corporate, specified foreign debenture, and secured notes denominated in USD. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million.
© 2010 LeConte Wealth Management, LLC.

Hoy Grimm

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