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?
