Why Stocks Keep Swinging in Such a Narrow Range

The stock market this year is best likened to an old car whose engine makes a lot of noise but just won't turn over.

Monday's surprise German interest rate cut sent the Dow Jones industrial average up 70.52 points. But the market took back 48.90 of those points Tuesday, as Wall Street quickly reconsidered its bullish bent.

That kind of mood-swing madness has been the rule all year. The result has been a push-me/pull-you market that has gone virtually nowhere, as measured by the Dow, the Standard & Poor's 500 and other popular indexes.

Analysts call it a "trading-range" market, meaning that major stock indexes have varied little from their high and low points.

Wall Street has seen trading-range markets before. This one, however, takes the cake.

As the accompanying table shows, the Dow has varied just 7.6% in price, measuring the change from the year's low to the high. That's less than half the smallest trading range between 1980 and 1991--a 16.2% low-to-high Dow swing in 1988.

What's more, though the year isn't over, many analysts say this may end up one of the tightest markets in the post-World War II era. "I really don't remember when we've spent such a great period of time in such a narrow range," says Marc Pado, a technical market analyst for Mesirow Financial in Chicago.

The question is why. Wall Street typically blames a stalled market on investor uncertainty. Obviously, there's plenty to be worried about this year: the election, interest rates and economic recovery, to mention but three.

But name a year when the stock market didn't face uncertainties. Fact is, there's always plenty out there for investors to fear. So it seems as if something else must be going on this year to account for the market's inability to stage either a significant rally or a dramatic selloff.

Here's one thesis: Justin Mamis, a veteran analyst with Gordon Capital in New York, sees Wall Street as increasingly becoming a prisoner of its own immense size, and its light-speed trading technology. Though it appears that nothing is going on, in fact plenty is, Mamis says--but the bulls and bears keep canceling each other out in rapid succession, while anti-volatility "collars" on such computerized trading keep the market overall restrained on any given day.

It has been only in the last 20 years, Mamis notes, that institutional investors such as pension funds have come to dominate daily stock trading. Before that, individuals ruled the market, and they tended to buy consistently--producing a steadily rising market from 1946 to 1972.

Today, institutions can move billions of dollars in or out of the market in seconds. Trading technology becomes more advanced each year, as does the quantity and quality of information available to professional traders.

"What we've never seen before is this vast an amount of money" capable of entering or exiting the market in a split second, Mamis says. Investors know that they don't have to commit to stocks for any length of time--they just go with the flow.

On each bit of news, big investors feel that they can place bets that are easily cancelable shortly thereafter, if the trend doesn't continue in their favor. Hence Tuesday's fast giveback of 70% of Monday's Dow gain. Hence a market that has gone nowhere all year--while investors spend much of their time second-guessing how they should play minor moves in the trading range.

"You say to yourself, 'I knew that damn stock was good for a 10% (gain), but not 15%. So why didn't I sell it when it rose 10%?' " says Mamis. Each win or loss within the trading range makes a trader think that he's getting savvier at the game. That may serve to narrow the range still further.

Of course, this trading range won't last forever. At some point, something fundamental will change: The economy will boom or bust; interest rates will slide further or rise. Investors either will pour in to stocks or flee the market in droves.

The most important question, then, is whether the patterns within the trading range give any hint about which direction stocks will finally break out. In other words, is this a market that is topping, or one that is building a base from which a new bull market will surge?

The longer the trading range continues, Mamis says, the more likely it is that this becomes a base rather than a top. Investors' hopes for higher stock prices, after all, form the base of a trading range. Essentially, the narrower the range, the stronger the hope underlying the market.

The Nowhere Market

Wall Street is stuck in a severely narrow trading range, worse even than the dull markets of 1984 and 1988. The change from low to high on the Dow Jones industrial average each year since 1980:

Pct. swing, Year High Low low to high 1980 1,000.17 759.13 31.8% 1981 1,024.05 824.01 24.3% 1982 1,070.55 776.92 37.8% 1983 1,287.20 1,027.04 25.3% 1984 1,286.64 1,086.57 18.4% 1985 1,553.10 1,184.96 31.1% 1986 1,955.57 1,502.29 30.2% 1987 2,722.42 1,738.74 56.6% 1988 2,183.50 1,879.14 16.2% 1989 2,791.41 2,144.64 30.2% 1990 2,999.75 2,365.10 26.8% 1991 3,168.83 2,470.30 28.3% 1992 3,413.21 3,172.41 7.6%

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