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ON WALL STREET, EVENTS THAT CREATE WEALTH are commemorated with souvenirs. My favorite is a Dow 10,000 baseball cap celebrating the first time the index registered five digits. I like this just slightly more than the "It's Back" T-shirt issued when the Dow first recrossed 10,000 -- after it had been practically cleaved in half during the credit crisis.
With the DJIA slouching, yet again, toward 10,000, and the financial system shuddering with uncertainty, some item -- aside from guns and gold -- is needed to express the moment. But selecting an appropriate one is difficult. Volatility is the zeitgeist of this market and this generation. As of deadline, it still was impossible to capture lightning in a bottle.
All that can be said with some modicum of certainty is that the markets are much more nuanced than they were three weeks ago, or even last May. Options traders probably have more opportunities than hazards, but straight stock investors face a near-term future of tumultuous prices.
Pros know this, prima facie, but everyone else should pay close attention to volatility levels in equity and index options. Some of the stock swings are so dramatic that volatility itself is once more volatile. This means you can be right on a stock's direction, and still get clobbered.
Over the years, I've learned to recognize traders' tone of voice as a sentiment indicator. Lately, I hear tense voices -- just as I did during the thick of the credit crisis. And on the floor of the New York Stock Exchange, one denizen says he increasingly hears people scream, often in real anger, when stock prices break lower.
This isn't to suggest that dark days similar to those of the financial panic are coming, but rather that a transition seems to be under way, in response to Europe's economic crisis and the mysterious May 6 flash crash.
Volatile volatility itself is another indicator and one that produces surprises. Consider this: Many investors expected the stock market to correct from its extraordinary run since March 2009, but for technical reasons, not because of fundamental problems in Europe.
In a May 14 note to clients the Vicar of Volatility, Buzz Gregory, a derivatives strategist at Goldman Sachs, pointed out that the Chicago Board Options Exchange's CBOE Volatility Index (ticker: VIX) had made an historic swing. Its flash-crash spike to 40, and decline to 27 over the following four days, capped the VIX's most volatile two weeks ever. Volatile volatility makes it difficult to use options to express directional views of stocks, because puts and calls can be too expensive to buy, and too cheap to sell.
How would we know the worst is over? Easy: when the CBOE creates VIX totems with catchphrases like "Make a Friend of Fear."
FOR A CINEMATIC PORTRAYAL of what happens to those who dance with volatility and sometimes win, sometimes lose, let us reintroduce you to filmmaker James Allen Smith.
Last summer, Smith was struggling to bring Floored to the big screen. The movie since has played on big screens in big cities, where film fans have viewed its story about how people struggle with money and change, as the world marches onward. The film is a real-life, grainier version of Oliver Stone's Wall Street. (Wall Street Money Never Sleeps, the sequel to the original, arrives Sept. 24 from 20th Century Fox, which like Barron's is a News Corp. (NWSA) unit.)
If you missed Floored in the theater, it's available on DVD at www.flooredmovie.com.
E-mail: steven.sears@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
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