The stock market continues to make investors wary. My friend Bob Jergovic, CFA and chief investment officer for CLS Investment Firm, LLC, and I were discussing some of these issues. Here are a few of the ideas that sprang from this discussion.

The various markets continue to be highly volatile. Over the past 12 months, there have been 114 sessions with a 300 point or greater intra-day swing in the Dow Jones Industrial Average and 32 days with a 400 point or greater intra-day swing.

Some so-called day traders are making huge trades based upon the headlines in the news. One day there is a breathtaking announcement about a failure on earnings or a bank write-down of mortgage loans. Down goes the Dow by 300 points. The next day the economic news is brighter than expected and up goes the Dow by 300 points. Trying to match the trading cycle of day traders is nearly impossible and should be avoided.

Dr. Brett Steenbarger recently looked at current trading conditions to see if “buying short-term strength” in three major indexes added value. He followed the S&P500, MSCI, an international index, and the MSCI Emerging Market index. The average loss per trader was about -.3% per trade.

Here was the method of measuring the trades. Investors who waited three days for a trend to assert itself and then bought were too late and would have an average losing transaction.

While Steenbarger’s research only went back to the beginning of 2007, another group, Quantifiable Edges, went back to 1960. Rather than look at trends up to three days, they looked at one-day trends. If the day was up, they bought on at the close. If the day was down, they “went to cash” and then repeated the process. In essence, traders bought on strength and sold on weakness.

The results? Buying on strength and selling on weakness actually worked very well for forty years from 1960 to 2000. Since 2000, however, the strategy worked poorly. In the past year and a half, follow-through price momentum has been the worst on record.

So the big question is, “Why is a very short-term strategy that worked for 40 years no longer working?” It may be because traders are no longer trading in days; they’re trading in seconds. One day is just too long for today’s traders.

There is so much information available now through the Internet and other media that investors have the world at their fingertips. Is this a good thing? Doesn’t seem like it to me.

So what is the bottom line? It is now more important than ever that investors ask themselves a simple question: “Am I a trader or an investor?” Not only does the answer to this question help define who investors are, it also identifies their time horizon. Knowing time horizon helps identify what portfolio changes are appropriate and also when they are appropriate.

 Notable quote: “Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone.” — Sigmund Freud

Tom Mills is a registered investment adviser and certified financial planner. He can be reached at 1030 Seminary St. Suite D, Napa CA 94559, 254-0155, fax 254-0158 or e-mail suntrm@aol.com.