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Market swings are becoming new standard
September, 12th 2011

The stock market just can't seem to make up its mind. Day after day, stocks swing sharply by hundreds of points. Last week they tumbled 3 percent in the first 90 minutes of trading on Tuesday morning, then on Wednesday closed nearly 3 percent higher and dropped almost 3 percent on Friday. All of this on the heels of unusual, back-to-back 4 percent leaps and dives in one week in August.

Now traders head into the week with fresh worries about the chances that Greece will default on its debt and the havoc that would wreak on European banks.

All of this anxiety has caused experts to ask whether there are new forces at work in the stock market that make trading permanently more erratic.

In fact, big price moves are more common than they used to be.

It has become more likely for stock prices to make large swings - on the order of 3 percent or 4 percent - than it has been in any other time in recent stock market history, according to an analysis by The New York Times of price changes in the Standard & Poor's 500-stock market index since 1962.

Some experts see volatility as a problem because it can scare investors away from the markets, make companies reluctant to go public and undermine confidence in the economy, causing further drops in shares.

But another viewpoint is that stocks are rightly volatile now because there is so much uncertainty about where the economy is heading - and canny investors could profit from the big swings, or simply sit them out until the market eventually finds equilibrium.

"It's neither good nor bad," said Michael Schmanske, head of U.S. index volatility trading at Barclays Capital. "It is a measure of high opportunity but also peril."

So what's causing the rise in the big bounces?

It's hard to know for sure, but market analysts point to new types of souped-up computerized trading and extraordinary global economic turmoil - from protests over a second bailout for Greece to the downgrade of U.S. debt.

It is also possible that stocks simply move faster today because of the quicker pace of news and trading, and so drops and surges in prices that might have been spread over days in past times are now condensed within hours.

Some economists say they fear the volatility may feed upon itself.

The violent ups and downs, said Robert Shiller, an economics professor at Yale, may in turn undermine confidence in the economy, and the weakness in the economy can lead to more strident politics - all of which feeds the volatility loop.

"It is not well understood why we have these bursts of volatility," Shiller said. "It seems that in these rare periods of bad economic performance and anxiety about the economy, we have volatility in the markets and high volatility in the political arena. Bad things can happen. This worries me."

The Times looked at two sorts of historical data - the closing prices of the S&P 500-stock index as well as the highest and lowest points the index reached during each trading day. Both measures, from 1962 through the end of this August, painted similar pictures of the market - it rises and falls more now in greater size.

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