Thursday, March 8, 2012

All or Nothing Days Revisited

Last year, we saw a whole bunch of what Bespoke Investment Group calls 'all or nothing days'.*

So how many have there been in 2012?

There have been none according to this recent post.

Where Have The All or Nothing Days Gone?

"In the second half of 2011, 'all or nothing days' in the S&P 500 were practically an every other day occurrence. This year though, they have been non existent."

There were 70 such days last year. To put that in perspective, during the entire decade of the 1990s there was a total of 27.

It's at least worth noting how much daily market price action has changed compared to last year.

The question is whether the kind of price action we saw on a regular basis last year will return anytime soon.

What I find more than mildly interesting is how relevant the following roughly 75 year old quote by John Maynard Keynes remains today.

The quote is from Chapter 12 of The General Theory of Employment, Interest and Money:

"If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase. In one of the greatest investment markets in the world, namely, New York, the influence of speculation (in the above sense) is enormous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market."

The only difference may be that it now has gone global. A bit later in the chapter, Keynes follows the above with this:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

The last sentence, of course, is one of his more well-known quotes.

Personally, I like when all the hyperactivity creates lower stock prices. Having said that, markets do a better job allocating capital if participants generally have a longer investing horizon and view the system as, if not necessarily safe, at least reasonably stable. Overall, it would be better if the extremely volatile and highly correlated price action of last year didn't return.

Unfortunately, I'm guessing at some point it will.

Hyperactive trading in response to the next real or perceived crisis isn't going away anytime soon.

Adam

* Any day when more than 400 stocks in the S&P 500 move in the same direction.
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