Testing Patience

David Gaffen of the WSJ had this to say:

Don’t like what the stock market is doing? Wait a few minutes. The Dow Jones Industrial Average was lately up 111 points, after losing nearly 200 points at one point earlier in the day.

Such swings have become commonplace in this period of increased volatility. Through the first six months of 2007, the Dow, on average, traded in a range of 111.69 points in any given day. By way of comparison, between the beginning of July and including today, the Dow has moved by an average of 198.62 points on any one trading day.

The volatility has only increased in the last month — during January, the average daily trading range for the 30-stock average has been 285.49 points, which includes today’s range, currently at 344 points.

What that means is the current wide swings are a sign that uncertainly in the market place about the major trend is here to stay for the time being. Eventually, a breakout will occur, either up or down, and a new major trend will be established. In the meantime, simply accept trading ranges of some 300 points as a temporary theme. The road ahead could remain rocky as David Nelson of Minyanville explains:

Without the wind at our back, making money and holding onto profits will be difficult at best as the wounds are fresh and will take some time to heal. The overhead supply of stock to be sold is large and getting larger. You can feel like you aren’t bullish enough when the market rocks and too bullish when the market rolls.

Investors are desperately searching for an investment theme that lasts for more than a few days. A change in leadership will probably lead us out but lately has the feel of one step forward and two steps back.

Most great investors will tell you not to panic. It’s good advice but it doesn’t just apply to panic selling. Yesterday was a buying panic. The market overdosed on “Fed cut euphoria” as investors went into a buying frenzy, fearful of missing the boat. By the end of the day we all had a hangover.

Let’s slow the process down and eliminate the day-to-day overreaction to every bit of news that hits the tape.

Read that last sentence again. Don’t get too caught up in day-to-day events and keep the big picture in focus. The big picture is that we try to get onboard major trends and avoid sideways patterns that serve no purpose other than to cause needless frustration.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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