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This is a Trader’s Market

Still, some recent economic news bodes well for investors


Market volatility continues apace. Not only have we been buffeted by one triple-digit Dow day after the next, but those triple-digit closings have masked much wider moves from low to high, and high to low. Tuesday’s 153-point Dow gain last week came after a 4.0% swing from high to low and back. That and Sept. 22’s move ranked as two of the most volatile days since August, when the debt-ceiling debate and S&P downgrade were roiling markets.

For the same reasons that I don’t believe investment markets “deserve” to drop by several percentage points, I also don’t think they deserve to rise by that much. Do investors really believe that a company like, say Exxon Mobil (NYSE:XOM), valued at about $350 billion, can be worth $14 billion more (or less) in the course of one day when no particular news relating to that company is released? What about Procter & Gamble (NYSE:PG), a $175 billion company with a rock-steady global business selling food and diapers? Can its value change by $7 billion in the course of a six-and-a-half-hour trading day?

We’re witnessing a trader’s market, not an investor’s market. The stock market was created as a mechanism for financing businesses — businesses with long-term objectives, goals, strategies, production cycles, selling cycles and the like. Sales of diapers, cars or computers don’t dramatically change in the course of six-and-a-half hours, and stock prices shouldn’t either — unless there’s a big piece of news that comes out directly related to that company’s services or products.

For investors like us, these market moves are opportunities — opportunities for the managers running the funds in our portfolios to pick up some shares in a company that are temporarily undervalued, or to sell shares in one that are temporarily overvalued. The volatility is good for a manager who’s willing and able to take advantage of it, but for you and me, volatility should be a catalyst for sitting on our hands. Only when values get out of whack does this create an opportunity for portfolio changes.

Yes, the screens filled with red, and the massive single-day declines in the Dow at several points in the past two weeks were unnerving. At the same time, knowing what I know about the managers running the funds in my portfolio, I was pretty sanguine about the opportunities they were salivating over.

As an investor, not a trader, I was encouraged by Monday’s read on manufacturing — which echoed the early indicators we got from the Chicago report Sept. 30 — and the report that rail freight traffic is near a three-year high. Nationally, manufacturing activity expanded, rather than contracting as it did in July and August.

And, as I suggested last month, slack retail numbers came back strong as shopping picked up in September. Thursday’s report on chain-store sales was a good one, and could have been one of the catalysts behind the Dow’s third triple-digit jump in as many days.

Article printed from InvestorPlace Media,

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