Educate Yourself - When 50 is better than 250

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When 50 is better than 250
by Charles B. Carlson, CFA
Dow Theory Forecasts

I've never been a big fan of big daily price moves, even moves to the upside. Indeed, I would much rather have a day when the market rises 50 points than one when it rises 250 points.

Let me explain.

In order for the market to show a sustained move to the upside, investors must want to hold stocks. The problem is that when stocks are flying around - up 200 points one day, down 200 points the next-investors don't want to hold stocks for any length of time.

In short, big price swings in the market promote a trading mentality - take your quick gain and dump the stock.

Thus, I would rather see the market's volatility tone down a bit. Indeed, I would rather see up days of 50 points rather than up days of 250 points.

A less volatile market would promote more of a "buy-and-hold" mentality among investors, which would ultimately be better for stocks in general.

Thus, if you want a signal that perhaps the market is ready to embark on a sustained rally, it will be when stock prices are going up 50 points a day, not 250 points.

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