One day the market swoons, the next it soars. Volatility is back, big time.
The action this week has been a textbook case of these yo-yo like movements for stocks. Thursday markets were on fire, with the Dow Jones industrial average DJIA-I tacking on more than 280 points. A day earlier, it fell 70 points, with most of the decline in the final minutes, a drop that reversed an earlier triple-digit gain. In Toronto, the TSX TSX-I muscled its way to a 200-point gain just a day after it faded sharply into the close.
Pundits are tying the action in both sessions to China and its purported intentions on dumping European investments.
In early May, there was the flash crash, a scary 1,000-point nosedive during a single session, while throughout the month there were twists and turns in share prices with each development in the Greek debt saga.
Regardless of the reasons for the swings, when extreme volatility hits, the question for investors is always the same: Is it time to run to stocks, or run from them?
Many market pros, thinking like contrarians, believe high-volatility periods are a buying signal because they’re usually a reflection of panic. Investors are dumping stocks because they’re frightened, typically a sign that the market drop has just about run its course.
“The big pick-up in volatility usually coincides with a decline” in stock prices, and increases the chances that shares are trading at oversold levels, observed Paul Hickey, co-founder of Bespoke Investment Group, a U.S.-based market research firm.
“We’re looking at the indicators we track. Most of them are hitting oversold levels that we’ve only seen a handful of times in the last 25 years,” Mr. Hickey said. “What they’ve typically led to in the past is they’ve been good buying opportunities over a three- to six-month period.”
