You´re right, the MD-80 "bobs". It depends greatly on how much climb rate you have just before altitude capture. For example, if you let her climb with 2500 fpm or more, you need not complain if she´s "overshooting" about 50 feet, then overcorrecting in the other direction (means down). But if you´re nice and gentle and you´re climbing with about 1000 fpm, she´s doing the level-off much smoother.
But the passengers don´t feel the bobbing. They just sense the initial capture phase (as in any other aircraft, i suspect) when the autopilot gives a nose-down-input to change the pitch from about 5-15 degrees to about 0-5 degrees nose-up (depending on aircraft trim). If you have a high climbrate, the plane starts to capture the altitude/level much earlier than at a low rate (which is only logical) . Nevertheless this nose-down-input is much stronger then, and for passenger comfort its better to approach your cleared level with low climbrates.
Before anyone yells at me now and tells me that no MD-80 can make 2500 fpm climb at high altitude: I´m not talking only about level-off at cruising level, but about level-offs in general. ("stop climb at FL90 due to traffic", etc.)
For the bobbing in cruise: again you´re right, sometimes the needle of the altimeter is oscillating +/- 20 feet (or even more) around the altitude/level. Reasons for that are (a): a "wrong" sensing of the barometric altimeter (3-20 feet are not really much, don´t you think?) and (b): a not-state-of-the art autopilot which is simply too slow to hold the plane perfectly at "zero". By the way, i´d like to know if a "modern" aircraft can maintain altitude/level that exactly (+/- 0, i mean). I doubt it. But again, the passengers don´t feel it, because if there are changes in the attitude (pitch) of the aircraft, they are too small to be sensed.
hope this helps martin