Breakout

Big Tech Stocks Volatile as Investors Get Ready for Facebook IPO: Najarian

Jeff Macke
Breakout

Since the end of the placid, though bullish, first quarter, volatility in the the market has exploded in April. Particularly impacted have been past and current high-flying shares like Apple (AAPL), Priceline (PCLN), and Google (GOOG), all of which have seen moves over 3% multiple times in April.

Is this volatility a function of profit taking, earnings worries, something else entirely, or all of the above? In the attached clip I discuss the relatively frenetic trading pace with Jon Najarian, co-founder of TradeMonster.com. Najarian "made his bones" in the CBOE options pits, so he knows a thing or two about fast markets.

Najarian says some of the weakness may be attributed to traders raising money ahead of the Facebook (FB) IPO next month. Considering the $50+ change in Apple's market cap compared to the roughly $10 billion in shares Facebook is issuing, this only makes sense when you take into account the murky backrooms of Wall Street.

Selling Apple in size does a couple things for a portfolio manager. For one, it locks in profits at a lower tax rate than is likely to be in place the following year. Also, the selling creates a ton of commissions, currying favor with banks who may be able to allocate some pre-IPO FB shares in appreciation.

Selling Apple, Priceline, or Google in size also creates downside momentum in a stock, as supply overpowers demand. In the era of high-frequency trading, getting one move started is all it takes to create a bigger move.

"All you need these days is a catalyst to push a stock to the upside or the downside," says Najarian. "Once it gets going, a lot of the algorithms out there use it to their advantage."

Algorithms are simply the programming, or virtual decision-making process, of computerized trading. These trades are made without human intervention and are intended to capitalize on infinitesimal moves in a stock. What the company does is entirely incidental.

Once one of the high-frequency trading algorithms picks up a trend, it automatically "front runs" subsequent moves. If a stock is moving higher, for whatever reason, the algorithm tends to push it higher still. This momentum can be higher or lower; the computer is indifferent. When a move gets extended, the computer bails, leaving real human beings to pick through the wreckage.

"About 72% of all volumes are generated by computers," says Najarian. "They trade almost at the speed of light."

Once the human factor is removed from the equation, price volatility becomes self-fulfilling. There may be subdued whispers that Mac shipments are weak, but that hardly accounts for what Najarian says are "three or four 4% moves in the last two weeks."

Najarian says Apple is trading 2x normal volumes. Considering the increase in Apple's stock, that means it takes 40% more money to trade 1,000,000 shares of Apple now than it did at the beginning of January.

"That's both worrisome and a sign that the algos are in there," says Najarian. It's also a reason to question anyone offering a pat explanation for what's "driving" a stock price.

Please answer our poll question below: Which do you consider the most valuable today: One share of Apple, one share of Google, or $600 in cash?

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