Stock Volatility Datapoint of the Day

Includes: DIA, QQQ, SPY
by: Felix Salmon

You might have noticed some large moves in the stock market yesterday: the Dow rose over 400 points. Is this an Important Event, or is it just market noise? Commenter Danw thinks it's the former, telling me that I am "doing [my] readers a disservice to suggest that a move such as this is worthy of ignoring".

In my defense, I had said in an earlier post that the move in Bear Stearns (NYSE:BSC) stock specifically was worthy of ignoring, rather than the move in the stock market as a whole. But then again I'm not getting particularly excited about the move in the stock market more broadly, either.

If you invest in stocks, you have to expect volatility. Sometimes, that volatility is going to be to the upside, and it makes sense to treat such moves with equanimity. After all, you'd probably get much less excited if the stock market rose or fell 4% over the course of a month. But your time horizon, if you're a stock-market investor, is measured in years. So it really shouldn't matter to you if this 4% gain happened in one day or one week or one month.

And just step back a tiny bit: the stock market closed yesterday a little bit below the point at which it opened on Thursday morning. Since then, we've had three down sessions followed by one up session, and we're back, more or less, to where we started. You really think there's more signal here than noise? What we're looking at is volatility and technical factors: the Fed's announcement yesterday morning was well timed to coincide with a point at which the market was oversold and needed an excuse to rally.

I'm quite glad that Eliot Spitzer is still dominating the news: it means that stocks might stay off the front pages. (I can but hope.) Altogether too much attention is paid to day-to-day movements in the stock market, and while it makes more sense to do that on big-move days than on little-move days, there's nearly always less real news there than meets the eye.