to HomeThough this article by Mr. Helzner is going on four years old, it remains one of the best private explanations I’ve read as to why the market has not only become more volatile in recent years, but has also truly taken on a new identity. I have referred to it often as one of the better explanations as to why market moves that used to take weeks or months now take days--or even hours.
What Works Now?
Today’s Stock Market Really Is Different
By Jerry Helzner
June 12, 1995 issue of Barron’s
Since October 1987, stock market behavior has broken most of the old rules and
befuddled most of the old experts. Even now, almost eight years after the market loudly
told us it was no longer going to behave in traditional ways, many of the most widely
recognized analysts cling to ideas and concepts that no longer work. When I try to
evaluate the stock market these days, the words of the old Buffalo Springfield song come
to mind:
Something’s happening here, what it is ain’t exactly clear.
I don't pretend to have the answers to why the stock market of the 1990 acts as it does, but here are a few observations that investors might find helpful:
1. All cycles have been speeded up. Individual stocks now routinely gain or lose 20% or 30% of their value - and sometimes more-in a single trading session, as witness this spring's two-day debacle in the HMO group. A decade go, such a move might have taken months to play itself out. Compressed cycles are a key to the stock market of he 1990s.
Why is this happening? I offer two explanations.
The entire economy, from manufacturing to advanced technology, is operation compressed cycles. Products that once took years to develop are being brought to market in weeks. Companies move from fledglings, to industry leaders, to has-beens in a matter of months. Thus, stock values change rapidly because they are responding to a rapidly hanging real world.
Also, information is disseminated and evaluated so quickly these days that a company can become a darting or a drag overnight. Once it is so labeled, money managers don't hesitate to make their moves in or out of a stock.
2. Traditional bull and bear markets may no longer exist. This is a hard one for most old-school analysts to accept. But recent evidence shows that the days of relatively extended and definable bull and bear markets appear to be a thing of the past, at least for now. The broad averages are misleading. Stocks now move much more as individual entities and industry groups than as part of an overall market. It's quite common-these days to see a group such as the semiconductors soar into the stratosphere, while the retailers remain earthbound.
Even within an industry, there are huge divergences in stock performance. Digital Equipment has fallen almost 200 points in recent years, while Compaq Computer was skyrocketing. More recently, such high-tech stars as Intel and Altera blew through the roof, while their less successful brethren Tandem Computer and Banyan Systems languished. These stocks responded to company-specific developments - not to any underlying bull or bear trend. This type of stock behavior is being repeated over and over, particularly in the technology area. If you're an investor these days, you must know your companies. If you don't know what Intel's CEO had for breakfast yesterday, you might not belong in this market. And if you still believe in bulls and bears, you might not belong in this market, either.
3. Buy and hold strategies might not work anymore. This is the era of the astute trader. I know a trader who buys Upjohn, the pharmaceutical company and perennial takeover candidate, every time it drops below 30 and sells it every time it tops 35. He has been making a comfortable side income doing this for-the past two years. Good traders - who tend to be intuitive - appear to have the flexibility to catch the swings in individual stocks. For example, when I talk to trader friends about Mallinckrodt, the maker of medical products, our conversation goes something like this:
"If you can get in at 29, do it, but yeah, it's like that other medical-products company, C.R. Bard; there's usually a good four- or five-point swing in the stock you can play."
This might not qualify as investing, but it's what works these days. In truth, I am not comfortable with these new realities. The prospect of one of my stocks losing 30% of its value in a single trading session is disturbing. Back in April, a coworker casually asked me to get her a quote on U.S. HealthCare, the bluest chip of the HMOs.
"It's down almost six points," I had to tell her. "The broker says there's no more earnings growth expected in HMOs. It's killed the whole group." She turned ashen.
Should the average, long-term investor have to deal with these kinds of shocks? Probably not. But the average, long-term investor probably doesn't even belong in stocks given the trading environment that rules this market. A lot of supposed "experts" don't want to confront the truth. They want to stick with the comfortable theories that served them so well in the past. And they'll continue to find reasons to justify their views. But that was then and this is now.
And those who put their heads in the sand and refuse to recognize today's realities will be as lost as someone who tries to drive across the country using a map from the 1950s.