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April 1, 2000

A Walk on the Wild Side: The roller-coaster ride of the U.S. stock market has produced some brill

By Sanford Wexler

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Volatility and volume may be at the cornerstone of a successful trading strategy today. Nasdaq market makers, pummeled by wild movements in stock prices, seek to catch the profitable swings. The concept seems simple.

Not all buy-side traders, however, see the concept in such a simple light. Volatility, some of them say, is a heavy burden.

Portfolio managers would normally cheer whenever their stock picks posted huge upward price movements. But the lightning speed at which some stocks today are rising and falling - and rising again - can make cheering seem premature.

"The stock swings are huge," said Barbara McFadden, a trader at Peregrine Capital Management in Minneapolis. "It doesn't matter whether I am buying or selling. My first report is going to be a point from where I went into it."

"The institutional trader must be disciplined to deal with the hour-by-hour swings in stocks," advised Thomas J. Bardong, head trader at Alliance Capital Management in New York. "The trader must have the ability to handle smaller [amounts of] order flow, which either directly to the floor or through the machines, can move stocks sharply on an hourly basis," he added.

What's happening? Nobody knows for sure but in the so-called New Economy, old-fashioned valuation tools do not help as investors pour disproportionately large sums of cash into technology issues. Those stocks have certainly helped propel the Nasdaq composite index above 5,000.

The accompanying volatility, however, has been as unexpected as it has been profitable for some investors.

Walter Zagrobski, a portfolio manager at Appleton Partners, a money management firm in Boston, predicted that the stock market, especially Nasdaq, will remain excessively volatile until a large number of the New Economy stocks experience a considerable setback.

But the Old Economy stocks are not exactly out of favor, as a recent rally fuelled by traditional blue chips seemed to illustrate.

"The discipline for the institutional trader," Bardong said, "is not to follow the stock down, but to realize that the stock will settle down and move back to where it was before. That's the newest challenge that the institutional trader has to deal with."

Taking the Blame

Several trading pros stress that some of the daily percentage swings are modest. These pros add that the percentage swings tend to seem worse than they really are, because of three-digit point swings reflecting the climb in the indexes. But they acknowledge that on many days the volatility can be as treacherous as a hurricane.

In January, for instance, the Nasdaq Composite Index moved by more than two percent in 10 out of 21 trading days. (During the period from 1988 through 1995, there were only 10 such days).

Some experts think the volatility is a sign of a coming bear market. But others are not so sure. In this New Economy, they say, there is room for even more spectacular gains in the technology sector where most of the biggest upward price movements have been registered.