As Volatile as She Gets

Up 300 points one day, down 300 points another day… How can investors keep calm in the stock market today?

The stock market’s ups and downs and their effect on the nerves of investors are all related to how investors play in the stock market. If we are dealing with an investor that maintains a buy-and-hold mentality, that is one thing. If we are dealing with an investor who trades the market in and out, the market’s big ups and downs are obviously nerve-racking.

Most of the stocks we recommend in our various stock advisories (we publish 24 of them) deal with special situation micro-cap, penny stock or small-cap stocks, because that’s where we believe the money can be made in the stock market. We do not publish a single advisory on “big-cap” stocks because we feel investors could make more money with ETFs and index funds than they can with individual big-cap stocks.

A very important point I notice with the recent volatile market swings is the lack of up or down volume. When I look closely at the big 300-point single-day gains or losses by the Dow Jones Industrial Average, volume is lacking. To me this indicates there is no definite direction for the market. You can’t say a market is in bullish mode when it rises by 300 points on weak volume and you can’t say it’s a bearish market when it falls 300 points on little volume.

The news of late has definitely been the financial stocks. This morning, Lehman Brothers, the fourth largest securities firm, is the big news. Monday the big news was Freddie Mac and Fannie Mae. Yes, American securities firms are taking it on the chin. But we need to keep perspective on two important facts.

Firstly, the financial companies that are seeing their stock punished in the stock market are the same companies that made billions of dollars during the U.S. boom years of 2002 to 2005. Secondly, the Fed has emerged as the average investor’s best friend. The Fed saved Bear Sterns, Fannie Mae and Freddie Mac. I’m sure it will be ready to help other important financial companies as the need arises.

I’ve written about how I’ve been impressed by the Dow Jones Industrial Average’s reluctance to fall flat on its face. As of Monday night’s close, the Dow Jones was about even with its mid- January 2008 price level. On the volatility front, investors need to remember this is a global marketplace now. Economic rumors move faster between Europe, Asia and North America than ever before.

Companies with new products, new management teams and new discoveries are where small investors like you and me should be invested…not in the big-cap stocks that have become ever so volatile in today’s market.