A Glimpse of Market Panic


Reuters blogger Felix Salmon posted an interesting picture yesterday. It shows the correlation among S&P 500 stocks, which recently hit the highest point in at least 30 years -- higher than the crash of 1987 and higher than the 2008-2009 market meltdown.

In English, stocks are moving in the same direction more than ever before. Either everything is going up or everything is going down. Aug. 8 was the first time in 15 years that every stock in the S&P 500 closed down. Even in the most chaotic days of the 2008 financial crisis, a few stocks managed to eke out a gain. And even during the most jubilant days of the 1999 stock bubble, a few names performed poorly. Not lately. Daily moves have been an all-or-nothing game.

This points to two things. One is a general sense of panic. There's very little rationality in today's stock moves. Rather than a cool, calm analysis, whatever is moving stocks seems to be operating with an attitude of "get me in now or get me out now." If we are heading into a recession, cyclical companies like General Motors (NYS: GM) or Alcoa (NYS: AA) would probably be dinged hard. But would Google (NAS: GOOG) ? Or Amazon (NAS: AMZN) ? Unlikely. Both are being pushed by the tides of whichever way the market is moving. It's an emotional reaction that has little to do with what the stock market is supposed to reflect -- the collective estimate of business values.

That's one explanation. Another is that what's moving the market is the opposite of emotional -- programmed computers following algorithms. According to Gary Wedbush of Wedbush Securities, high-frequency computer trading has made up 75% of total stock market volume this month. These programs don't care about discounted cash flows, innovation, or good management. They care about buying and selling faster than the other programs. There's very little public information on high-frequency trading, but it's nearly certain that they exacerbate market moves in either direction -- deeper down days and bigger up days.

In either case, it's safe to say that there's a good amount of madness in today's market. Frankly, that's a good thing. The best opportunities come from exploiting those who are freaking out or those who have a different time frame than you. As Ben Graham says, "In the short run, the market is a voting machine, and in the long run, it is a weighing machine." That's as true today as it's ever been.

Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Google, andAmazon.comTry any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy

At the time thisarticle was published

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.