24/7 Trading? Maybe We Need to Sleep on This One

After the last three weeks, anybody still want to stand up and make a strong argument for 24-hours-a-day, seven-days-a-week stock trading?

We’ll never know how many productive hours people lost nationwide, or worldwide, in April as they traded, tracked or simply fretted over their wildly gyrating portfolios.

Now imagine if, instead of being fixated on their stocks for a mere 6 1/2 hours a day--or nine hours if we include the bulk of current “after-hours” activity on electronic trading venues--investors had to fear what the market might do to them, say, in the middle of the night, or during church on Sunday.

The obvious advantage of the trade-anytime world we’re moving toward would be that you wouldn’t have to wait on some stock exchange’s arbitrary hours to take a profit, cut a loss or snap up an opportunity.

It sounds great--until you realize that it could mean you’d always feel as if you have to keep one eye on your stocks. You might not be moving money around, but somebody else’s moves could be wreaking havoc with your investments while your back is turned.

Like a tantrum-prone 2-year-old, a 24/7 market would demand your constant attention. But even 2-year-olds sleep sometimes; a 24/7 market, by definition, never would.

Institutional investors already have the opportunity for near-24/7 trading in some big-name stocks that trade in the United States, Japan and Europe, of course. DaimlerChrysler, in fact, was designed to be the first “global” stock, trading on markets in eight countries since its launch in 1998.

With technology evolving at warp speed, the hardware and software are certainly there (or will be) to eventually give us 24/7 online trading in virtually everything, from the comfort of our homes.

But those investors who have been mentally worn out by the stock market’s volatility over the last three weeks may well question just how much fun a nonstop market would be.

Computers don’t require much downtime, but the human brain still does.

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Some investors’ desire to simply get away from the market for a bit undoubtedly helped produce a relatively calm day to end last week’s trading, before the Good Friday observance.

The Nasdaq composite index eased 62.53 points, or 1.7%, on Thursday to end the trading week at 3,643.88.

After diving a record 25.3% the week of April 10, Nasdaq rebounded a combined 14.2% last Monday and Tuesday. After pulling back Wednesday and Thursday, the week’s net gain was 9.7%.

New investors may assume this is just the way it goes with Nasdaq and its volatile technology stocks. But even for Nasdaq, these swings are without precedent, according to researchers Greg Jensen and Vivin Oberol at investment firm Bridgewater Associates in Wilton, Conn.

In the 20 days through last Tuesday, the average intraday swing of the Nasdaq composite index was 5.8%, Jensen and Oberol calculated.

Nothing on that scale has occurred before. Most of Nasdaq’s wild periods, back to the October 1987 market crash, have resulted in peak 20-day-average intraday swings in the 3% range.

All the better if volatility has reached new highs, Wall Street bulls say: That must mean the market is bottoming.

In fact, there is good reason to think so.

“Peaks in volatility historically have been associated with bottoms,” Jensen and Oberol noted in their report last week.

Using the rolling 20-day measure of average intraday volatility, Nasdaq’s craziest periods of the last 13 years ended in November 1987, August 1990, April 1994, August 1996, November 1997 and October 1998.

In all of those cases, the Nasdaq composite index was either at or close to its bottom for each cycle by the time the volatility peak was reached.

Still, Jensen and Oberol also found that, with the exception of the 1998 volatility peak, “There has been little reason to jump into Nasdaq during periods of record volatility--and high risk if you are early.”

Sixty days after the volatility peak in 1987, the Nasdaq index was up just 2% from its level at the volatility peak.

In the cases of the 1990 and 1994 volatility peaks, the index was lower 60 days later (by 8% and 3%, respectively).

The index was 9% higher 60 days after the 1996 volatility peak, but was unchanged after the same period following the 1997 peak.

Only after the 1998 volatility peak did Nasdaq stage a dramatic rebound within 60 days: It was up 34% in that period. (That was when the Federal Reserve was cutting interest rates after the Russian debt default in August 1998.)

If you assume that the volatility peak has been reached in this cycle, history suggests that we have indeed seen, or are close to, Nasdaq’s bottom. But there is, of course, no way to know if we’ve seen the peak; even wilder swings could be directly ahead.

Even if volatility has peaked, Nasdaq’s near-term performance after most such peaks since 1987 suggests that the potential reward for jumping in right away “is small relative to the risk that the market continues its sharp tumble,” Jensen and Oberol argue.

In other words: It’s better for buyers to be patient.

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Economist Jude Wanniski, among others, has suggested that the major reason for the market’s dive leading up to and including Friday, April 14, had nothing to do with valuation issues, or Microsoft’s antitrust case, or the Fed.

Instead, he says, the primary cause of Nasdaq’s plunge, in particular, was investors’ need to raise cash to pay their tax bills, which were due on April 17.

“In late March of this year I made the connection when I realized my three children would have big tax bills because of their dramatic 1999 portfolio gains,” he told clients in an e-mail last week.

“My daughter’s tax bill would be three times the size of her schoolteacher salary, and she had put off a trip to the tax accountant to learn about this until the last minute,” he said. “I realized she only could meet her IRS obligations by selling her Internet stocks, which is all she had in running up those gains.

“As March gave way to April and the [market] slide steepened, it seemed clear to me this was the key to the bear slide--and that it would end the last trading day before the April 15 weekend.”

Of course, Uncle Sam always makes a convenient target for whatever ails us.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com