Why is the Stock Market so Volatile Now?

August has been an extremely volatile month for the stock market.  With daily surges and dips will above 400 points, both the media and investors are asking the question “What’s happening to the markets?

I’ve heard many people try to explain what’s happening to the markets and the majority of explanations will involve one or more of the following:

Decisions Driven by Fear

When people are uncertain about the stock market, they will often let fear drive their decision to sell.  Unfortunately, this is a ripple effect that can cause people to make decisions that may not be in their best interest – that is sell low and buy high.  The problem with letting your emotions drive your investment decisions is that you’ll probably get out at the wrong time and try to get back in at the wrong time.

Overseas Worries

Uncertainty about the debt crises over in Europe is also causing investors to pull out of the market.  This too is driven by fear, which can cause irrational selling of stocks and drive the price lower and lower.

Political Uneasiness

With the latest downgrade in the US Credit rating, unemployment hovering over 9% and the looming amount of debt owed by our country, investors don’t have much to hold on to with respect to security.  They’re uncertain about our next steps as a nation and show it with their decisions to change their investments.

Computer Trading

An interesting point that I heard recently about the volatility in the market pointed out that computer trading may be part of the reason why the stocks have jumped around so much.  Certain algorithms will prompt computer systems to buy and sell stocks, which can be dangerous when mixed with fear based trading.  As the markets decrease in value because of investor uncertainty, some have said that these computers may have also contributed to some of the large rises and falls due to the large trades that happen automatically.

There certainly are a lot of reasons why the market is reacting so strangely, and if I knew exactly why, I’d be a rich man right now!  Unfortunately, we can’t pinpoint exactly when the market will rise or fall.  If there is a good thing to all this volatility, it would be that you might be able to buy into great companies at a discount!

Do you agree or disagree with any of these reasons?  What is your strategy right now?