CNBC's Bob Pisani reports on what traders were saying at the close:
Another day of big volume and big volatility. What do we mean when we talk about volatility? We mean this:
(% change from high to lows today)
Russell 2000: 2.0%
Home builders: 8.7%
These are indexes, baskets of stocks, not individual stocks: This is BIG volatility. And indexes like the CBOE Volatility Index, which hit a 4 year high, are anticipating continuing volatility in the short term.
Why the late-day turnaround?
With volatility like this, it's no wonder traders are lost and confused; the momentum guys are not sure if they should be buying or selling.
Confusion reigns; you can smell it on the street (Pisani's Fourth Law of Broadcast Journalism: you know you're in trouble when your best sources call YOU and ask YOU what's going on.)
Here's what happened: fear levels are so high that traders are reluctant to even consider buying into the close. But many bulls can smell that the market is oversold, so they want to buy, but they need some signal, even a feeble one.
At 3:40 pm ET each day Market On Close (MOC) orders are posted that indicate if there are unusually high levels of buy or sell orders for individual stocks at the close. The purpose is to let market participants know what kind of orders are around and to attract buyers or sellers to imbalances. These orders are revised again at 3:50 pm
These MOC orders normally make little difference in the market close, but with fear so high investors look for some sign of what is going on. When they saw that the MOC orders were relatively benign (about even buys to sells, not heavy volume), they came in and bought heavily.
Pisani reported earlier on what traders were telling him in early afternoon:
Real Estate Investment Trusts (REITs): What's up?
There have been notable declines in REITs in the past seven trading sessions. REITs are stock companies that own and manage real estate on behalf of their investors. The most notable declines are in mortgage REITS, but there has also been notable declines in REITs in the apartment business (Equity Residentialshares down 16.3%), office properties (Boston Properties shares down 11.4%) and retail (General Growth Propertiesshares down 12.4%).
To understand why, let's look at the Cliff Notes version of what's happened in the credit markets:
1) global markets have been repricing risk.
2) spreads of debt instruments have widened relative to the yield on 10-year Treasurys.
3) there has been a notable reduction in liquidity.
The fact that the collateral behind much of the debt (ex-subprime and Alt-A mortgages) is trading pretty much in line with expectations is not important. The markets are trading on emotion, not on facts.