Sometimes the market seems like a carnival ride gone horribly wrong.
For the past week, the major indexes have shifted direction daily, investors piling money into stocks one day only to pull it out the next.
"It's this constant fight between the manic tech buyers and the depressive sellers," says Jim Volk, co-director of institutional trading at D.A. Davidson. "It's really hard to figure this stuff out -- these stocks are just crazy."
Although the impression may be that the market has been volatile lately, the current chop is in line with what stocks have seen for the past few years. In fact, since 1998 the three-month realized volatility for the benchmark
S&P 500 -- a measure of the average up and down movements of the index -- has rarely been as low as it is now.
Source: Merrill Lynch
So why this feeling among investors and traders that they're getting beaten with a stick?
Perceptions of volatility in the market and actual volatility are not the same thing. After a five-year period of remarkable stability, market volatility began to turn higher in early 1997 and kept on climbing. Increased volatility is supposed to make you want to own stocks less -- it makes them riskier -- but in the late 1990s (except for a couple of crisis-induced conflagrations) investors were having too much fun making money to worry too much about how the market was shaking. After the market peaked in March last year, they were too busy watching past gains bleed out of their portfolios to think about volatility.
But for the past few months the market has been rangebound, and suddenly all that rocking about is being felt.
"You don't notice volatility when the market is going up because it's working in your favor," says Bollinger Capital Management President John Bollinger. Now, even though volatility is around where it's been for the past several years, people feel beaten up.
If current volatility levels persist and the major indexes make little headway, many investors could scale back on stock investments -- which in turn would ensure that the market will make little headway. There is, after all, little point in walking through a minefield if you're not getting paid for it.