Stocks could see more late-day reversals

By Caroline Valetkevitch

NEW YORK (BestGrowthStock) – Stocks have been on a bumpy road since the May 6 sell-off, and it’s not over yet.

Strategists see the recent last-hour market swings continuing as the European debt crisis injects more uncertainty into the market.

Investors say these volatile shifts reflect a lack of buying interest among retail investors and a day-trading focus for participants because they don’t see a clear direction for the market.

Indexes nose-dived in the late afternoon May 6, causing the Dow Jones industrial average (.DJI: ) to experience its biggest intraday point drop ever. The Standard & Poor’s index (.SPX: ) is down 9.8 percent from a closing high on April 23, and had been down more than 10 percent, putting it in correction territory.

“After such a deep, sharp correction in the market even short-term oriented traders are quick to shoot first and ask questions later,” said Elliot Spar, option market strategist at Stifel Nicolaus in Shrewsbury, New Jersey.

The Standard & Poor’s 500 index (.SPX: ) ended in positive territory on Tuesday after staging a late-session rally. Earlier in the session, the three major indexes had fallen about 3 percent. Wednesday’s session was the inverse — a 2 percent rally given back at the end of the day.

Markets like this one tend to be overly affected by various types of late-day electronic trading.

“Because you don’t have a lot of people with conviction, you have thinner markets, there’s less liquidity, meaning that a sell program that comes in toward the end of the day is having a much more outsized effect on the market’s direction,” Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

The uncertainty has been evident in the rise in volatility. The Chicago Board of Options Exchange volatility index, or VIX, (.VIX: ) rose to a 52-week high of 48.20 on May 21. The VIX has fluctuated wildly amid the ups and downs of recent sessions. Realized volatility on the Standard & Poor’s 500 (.SPX: ) index is 28.2 percent over the last 30 days, not far from a 52-week high.

Volatility has been elevated since May 6, when the S&P 500 fell through key support levels. It breached its 200-day moving average last week in another sell-off.

Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group in New York, said investors who don’t like volatility are choosing to play it safe.

“People that can’t tolerate higher risk and volatility levels appear to be watching from the sidelines,” he said.

The uncertainty and high volatility could mean the S&P 500 will have a hard time in the near-term adding to gains made since the March 2009 lows. The index is still up 61 percent from that trough.

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(Additional reporting by Doris Frankel and Chuck Mikolajczak; Editing by Andrew Hay)

Stocks could see more late-day reversals