SOMETHING INTERESTING HAPPENED IN THE STOCK MARKET

Yesterday, I was watching the Stock Market opening. After about a half hour, I went to our kitchen to get some coffee. When I left, the DJIA was UP by 70 points and, when I returned, perhaps two or three minutes later, the DOW was UP by 120 points–and it rose to approximately 145 points by a half hour later. I had been watching the Pre-Opening for about an hour before and such a run–some 50 points in just two or three minutes–was just unbelievable and unexpected..

But, then, I noticed the report of the ISM, a purchasing managers response to a poll. It was recorded as 51.5, for September. Generally, a number above 50.0 is considered to reflect optimism among corporations. That wass after ratings of below 50.0 for the prior three months. Later in the day, comments by Federal Reserve Chairman, Ben Bernanke, caused the DOW to drop, closing at an advance of 78 points. Still good, however.

I was curious about that large, sudden move shortly after 10:00 AM (barely 30 minutes into the trading day). So, I checked the trading volume of “SPY”, an exchange-traded fund (symbol SPY), which replicates the composition of the S & P 500 “broad-based” Index. Just after 10:00, 26.5 Million shares had been traded. At the same time, “Diamonds” (symbol DIA), which replicates the composition of the Dow Jones Industrial Average, only had a Trading Volume of roughly 1.5 Million shares.

The significant difference, between SPY and Diamonds, at least to me, shows the fact that Institutional Investors often use ETFs to take advantage of shifts in the market. I noticed a similar event, in late 2008, when (then) President-Elect Barack Obama announced his Economic Team in late November. Having at least one question answered, during a time of Substantial Uncertainty, was considered welcome news by many market participants at that time.

I would direct your attention to my Blog Post, “Which is Better: ETFs or Mutual Funds?”, on May 12. There I pointed out that large sums of money can be quickly shifted–either into or out of the market–very quickly using ETFs. Billions of US Dollars cannot be moved into a handful of stocks without disrupting the markets. This works for overseas market, as well.

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  1. #1 by cheekos on December 31, 2016 - 3:09 PM

    Given that volatility, as well as the fact that institutions specifically use ETFs as a means of riding with the herd–the quick movement of money, either in one direction or the other. The volatility that particular day, however, was nothing like the market swings we encountered during The Great Recession–that time in 4Q07 to 1Q09 when swings of 1,000 to 1,500 points in a given day were all to often.

    When you follow the markets–any markets–and there is considerable volatility, it helps if you’ve BEEN there, DONE that before! The old “ice water in the veins” thing is truly something that cannot be taught! And that can especially be the case when you are advising someone, as to how they should respond, with THEIR money–and they are IN or NEAR Retirement.

    My suggest about how to react in volatile markets is: Don’t do anything until you can seem to sort things out; when you BELIEVE you think you know what is happening, respond decisively…AND DON’T LOOK BACK!

    About ten days after I dumped my Apple stock–25% of our portfolio–my Wife asked me how APPL was doing; but, I then told here that what we reinvested in had also gone up nicely. My old market cliche is: “A rising tide lifts all boats.” But, it must be remembered that when the tide goes out, those same boats go down (again). As Warren Buffet allegedly said: “That’s when you see who’s swimming naked!”

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