Stocks: Late-Show Chills and Thrills

During these wild times on Wall Street, the last hour of trading has been marked by rapid plunges—and sudden rallies. What gives?

by Ben Steverman

For one of the best signs of how the stock market is handling this time of deep fear and uncertainty, look at how stocks perform late in the day.

In the morning and early afternoon, indexes might swing wildly between "things aren't so bad" to near-panic selling. But as the closing bell approaches, traders know they'll be stuck with their decisions overnight.

As fear of a global credit crunch spread earlier this week, traders have spent the late afternoon flooding the market with sell orders. That's fear, plain and simple, market experts and traders say.

"No one knows who to trust," says market veteran Arthur Cashin, UBS Financial Services' (UBS) director of floor operations at the New York Stock Exchange (NYX). They don't want to be exposed to risk overnight when things could turn from bad to even worse.

But on Thursday, the market bounced back late in the day. Is that a sign investors' panic is easing a bit?

Night Moves

Late-session moves are a function of what Chris Johnson of Johnson Research calls "news-cycle risk." The latest bad news could come from a French bank, a Wall Street brokerage house, or a California mortgage bank, and such news usually hits between the 4 p.m. ET closing bell and the 9:30 a.m. ET opening bell. Rumors spread online and through trading rooms about who might next get hit by credit issues. Indexes took a turn for the worse at about 2 p.m. ET on Monday, Tuesday, and Wednesday.

It wasn't always this way. Until this summer, the opposite was the case. The market often rallied at the end of the week—"you could almost count on it," Johnson says—in anticipation of big merger-and-acquisition deals being announced late Sunday and early Monday. No one wanted to miss out on a big move.

But as the market fell day after day in the last week, no one wanted to get stuck in a market that gaps lower at the opening.

Traditionally, market pundits say, the last hour of trading is when the professional traders make their moves, while the first hour is for the more emotional, amateur investors. Of course, it's not that simple: In a market with thousands of participants making billions of trades, the reality is complex and often hard to quantify.

But it's true that stock markets have seen a rash of late-session sell-offs lately.

Off-the-Map Volatility

It's been tough for individual investors and especially day traders trying to time the wild market movements, says Ray Johns, senior market editor at DayTraders.com. "So many people have been conditioned over the last five years to play a market that is overall bullish," Johns says. "People tend to get conditioned to buy on the dips." But buying on dips or late in the day hasn't been working, he adds.

Birinyi Associates keeps track of market indexes during the first hour and last hour of trading. In the year to date, the S&P 500 is up 1.3% in the first hour and down 0.9% in the last hour. But those numbers have shifted from earlier in the year: From January to Apr. 20, the S&P 500 was down 2.2% in the first hour and up 1.5% in the last hour.

Cleveland Rueckert, a research analyst at Birinyi, is cautious on whether you can read anything into such figures. "It's very difficult market conditions just in general," Rueckert says.

Volatility, a gauge of fear and uncertainty in the market, is at an all-time high. The Chicago Board Options Exchange's volatility equity index was at a sky-high 30.7 at the end of Thursday's session.

That index reflects big and unpredictable swings in stock prices throughout the day and overnight, as buyers and sellers disagree from moment to moment about which way this market is moving.

Programmed to Sell… and Buy

Some market experts believe electronic trading is causing some of the volatility.