For years, the rap on professional basketball games has been that nothing exciting happens until the last two minutes.
Now the same might be said of the U.S. stock markets.
In the last year or so, investors have started to see sessions with massive moves in the waning minutes. Since Sept. 15, a day after Lehman Brothers collapsed in bankruptcy and Merrill Lynch (MER) sold itself in desperation to Bank of America (BAC), the trend has been amplified -- there have been dozens of last-minute selloffs and buying sprees.
Last Friday was a prime example. After wavering in and out of positive territory all day, the markets took off with about an hour left in the session after news broke that New York Federal Reserve Chairman Timothy Geithner was going to be nominated as the next Treasury Secretary.
The Dow Jones Industrial Average surged nearly 500 points in about an hour.
At least, that move was ostensibly prompted by news.
Consider Oct. 16, when the Dow jumped 401 points -- nearly all of it in the last few minutes -- after being down more than 400 points earlier in the session.
Here’s what Michael James, senior equity trader at Wedbush Securities, told FOXBusiness.com that day: “There’s very little rhyme or reason to these moves. Emotion and sentiment are driving the markets in both directions.”
On Oct. 28, the Dow rose 889 points, most of it in the last hour. Here’s James again: “It was pretty hard to figure out why we were up 400 points … let alone 900 points. Sellers completely walked away and there was a massive scramble to buy stocks … It was feeding on itself in the last half hour.”
November has been a lot of the same: On Nov. 13th the Dow rose 400 points in the last hour. The next day it fell 350 points in the last half hour.
The reasons for the late day madness are both technical and emotional.
Art Hogan, chief market analyst at Jeffries & Co., said the shift away from human oversight to electronic trading systems has contributed significantly to the wild late-day swings.
Computers are programmed to respond to certain triggers, such as selling or buying a stock when it hits a certain price, and they will respond no matter what. Humans are obviously more capable of discerning between panic and euphoric buying and selling.
The phasing out of specialists -- essentially market traffic cops who for decades patrolled the floor of the New York Stock Exchange -- has made it “hard to keep a fair and orderly market. It’s an unintended consequence of electronic trading,” said Hogan.
Another important dynamic has been fund managers under order to “raise cash.”
Aware that many of their investors are looking to get out of equity markets, fund managers have found themselves in need a certain amount of cash at the end of the day in order to fill redemption orders.
If by 3 p.m. the fund manager hasn’t raised enough money to cover his redemptions, it’s time for a reassessment in strategy, one that usually includes a far more aggressive approach.
“At that point you take the gloves off,” said Hogan. “You tend to sell stock indiscriminately and sell what you can, not what you want. There is no thought of fundamentals, you’re simply raising cash.”
Richard Peterson, an author and expert on investor psychology who recently opened a $10 million hedge fund with his firm MarketPsy Capital, explained how the technical can quickly turn emotional.
“Friday was really stunning,” he said, referring to the powerful and unexpected buying spree in the last hour of trading on Nov. 21.
It’s a situation that has played out over and over again in recent months as the financial crisis has left investors nervous and fearful of being caught on the wrong end of a trend.
“It’s forced buying and selling that cascades on itself,” said Peterson.
On Nov. 21 two pieces of information were in play -- Geithner’s pending nomination and optimism that a government rescue was in the works for Citigroup (C). In any case, investors began buying and others quickly got on board.
Peterson said the sudden swings tend to occur when “there is anticipation for the resolution of some set of uncertainties,” in Friday’s case who will replace Treasury Secretary Henry Paulson and what will stop the bleeding at Citigroup.
“People start betting one way or the other toward the end of the day, then others feel there must be an answer, that somebody knows something they don’t,” said Peterson. “In a really chaotic market, people take information from price -- they get their sense of where things are going from the price of the stock, not from any news.”
In other words, investors are getting “their cues from what other people are doing. They don’t have a clue so they watch what others are doing,” he said.
Market watchers say what’s really needed is consistency, a string of measured gains -- 75 points, 80 points, 90 points -- to start laying the groundwork for a genuine sense of stability and confidence.
It would be a welcome replacement for the fear-triggered volatility that has been giving investors whiplash for months.