DEFINITION of 'Yo-Yo'

Yo-yo is slang for a very volatile market; the name comes from the movements of a yo-yo, where security prices continually go up and down. A yo-yo market has no distinguishing features of either an up or down market, taking on characteristics of both. Security prices in a yo-yo market swing very high to low over a given period of time, making it difficult for buy and hold investors to profit.

BREAKING DOWN 'Yo-Yo'

Yo-yo markets can, however, be profitable environments for astute traders who are able to recognize buy and sell points and make trades before the market reverses. These markets are characterized by steep up and down movements in share prices that can occur within a short timeframe, such as weeks, days or even hours. The movements are often abrupt, without warning, and they usually involve a majority of the stocks moving in unison. Traders on Wall Street also refer to this kind of activity as “all or nothing” when everything about the market is either good or bad.

A Recent Example of a Yo-Yo Market

Since the market crash of 2008, the stock market has become more volatile, driven in some part by its hypersensitivity to macro events. However, the occurrence of yo-yo markets is still rare, especially those that last for several days or more. They are more likely to occur when market volatility picks up following a protracted rise in stock prices, which can tend to make investors nervous. For example, during the first six months of 2015, the Dow Jones Industrial Average (DJIA) never fluctuated up or down more than 3.5% as it rose to record heights. Then, in August, a convergence of macro issues, such as China’s slowing economy, crashing oil prices and the prospect of higher interest rates, sent the stock market in a steep decline.

From Aug. 20, 2015, to Sept. 1, 2015, the market experienced eight trading days in which the Standard & Poor’s 500 Index advance/decline reading was either above 400 or below 400, meaning 400 of the 500 stocks in the index were either advancing or declining at the same time. Within just two days, the DJIA had its worst and best days of the year. Prior to Aug. 20, there had been only 13 days when that occurred. The last time the market experienced an extended number of yo-yo days was during the stock market crash of 2008. During a 15-day period from Aug. 20, 2008, to Sept. 9, 2008, there were 11 occurrences, which is unprecedented.

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