A disturbing recent trend has emerged in the U.S. equity market and many are pointing to it as a potential reason to worry that the massive market rally over the last six months may be running out of steam. Investment strategists are concerned that a recent rise in speculative trading activity is signaling that the market’s dramatic ascent is getting a bit frothy.
This kind of trading is typically characterized by lots of smaller capitalization stocks seeing massive increases in trading volumes and dramatic price swings, often on little or no headlines warranting such trading activity. Indeed, in recent weeks we have seen a lot of wild swings in small cap biotechnology stocks as well as some financial services stocks that were previously left for dead.
For instance, shares of beleaguered insurance giant AIG (AIG) soared 27% on Thursday on six times normal volume. Rumors on internet message boards (not exactly a solid fundamental reason for a rally) which proved to be false were one of the catalysts for the dramatic move higher, which looked like a huge short squeeze....MORE
HT: MarketTalk who relays another link:
To be sure, other observers believe the “casino action” in these stocks ultimately won’t change prospects for the overall market. If these stocks are mini-bubbles, and they end up bursting sooner than later, don’t expect them to also take down the entire market, notes LA Times’ Money & Co blogger Tom Petruno.
He argues the summer rally’s largely been based on economic data pointing to the recession bottoming, and unless that changes, the rally has potential to run higher. From Petruno:
So when Wall Street gets back to work after Labor Day, it seems reasonable to assume that most investors will be far more likely to care about the latest economic numbers — and what companies are saying about third-quarter sales — than whether August’s small band of rocket stocks come crashing back to Earth.
Dow’s down 64; S&P 500 off 6.
