The Market Goes Bananas Yet Again: What You Need to Know

Every day we Fools keep our fingers on the pulse of the market and watch for stocks making big moves. Sometimes these pops and drops mean something and sometimes they mean nothing, but either way, we're here with our industrial-strength shovels to do the digging and fill you in on the "whys" of these swings.

Of course recently it's been less a matter of individual stocks getting loco and more a matter of the entire market going absolutely out of its mind.

As the U.S. stock market careened into deep red today, we can certainly point to a number of potential reasons that investors are jamming the "sell" button so hard that we could end up with a stock market version of Stomp.

  • Initial unemployment claims came in above expectations, and last week's tally was revised up.
  • Existing home sales for July were weaker than expected.
  • The Philadelphia Federal Reserve's report on area manufacturing plunged.
  • Investors fear that major banks like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) may be in worse shape than they're letting on.
  • There are concerns that European banks like Barclays (NYSE: BCS  ) and Lloyds Banking Group (NYSE: LYG  ) could make B of A and Citi look positively healthy.
  • Growth has slowed in Germany and France, the two countries that have been the Atlas of the eurozone.

And there's plenty more where that came from. The focus on the financial sector and the broad economy meant that financial stocks and stocks in industries like tech, industrial, and materials that are particularly sensitive to the strength of the economy were taking it on the chin. Citi was off as much as 10%, while Barclays saw a 13% loss at one point. EMC's (NYSE: EMC  ) loss peaked at 12% and Oracle gave up as much as 10%. Boeing (NYSE: BA  ) , Freeport-McMoRan (NYSE: FCX  ) , and Deere (NYSE: DE  ) , among many others, all endured heavy selling as well.

On the flip side of the picture, though:

  • A report today on leading economic indicators showed stronger-than-expected growth.
  • Earlier this week we heard that industrial production grew more than anticipated in July.
  • Last week we saw that retail sales are growing in line with expectations, and while business inventories grew less than expected in June, they were nonetheless growing.
  • Multiple sources show that individual investors are actually getting more bullish on stocks.
  • Even after a historic downgrade by Standard & Poor's, bond investors continue to treat U.S. Treasuries as the ultimate safe haven.

In other words, it's not necessarily that there's just bad news today, it's that the media is focusing on the bad news. And much of that bad news isn't even new. Banks around the world have been loping along for years now, so should anyone really be shocked to think that they're not magically healthy again? And the second-quarter growth numbers from Germany and France are days old now, which may seem pretty fresh except when you're trying to pin it as a reason for today's decline.

So why is the market really falling today?
It's because when you look at the stock market over short periods, the movements are dictated by investor emotion, not some actual calculation of the value of individual stocks or the stock market as a whole. Add in the massive amount of trading done by computers running on algorithms, and you simply douse that emotional fire with a drum of gasoline and end up with the hugely volatile days we've seen over the past couple of weeks.

As for the headlines, that's just the media trying to grab readers by giving them what they want -- a reason for the madness. But the selling today isn't because of the Philly Fed report or Germany's growth. It's because pessimism has flooded the market and made sellers more motivated than buyers.

Take a closer look
I don't think I'm going out on much of a limb when I say that the combined value of the companies underlying the S&P 500 didn't change 4.5% today. Similarly, it's highly unlikely that the value of CSX (NYSE: CSX  ) the company fell 6% today or that Ford (NYSE: F  ) is really worth more than 6% less than it was yesterday. And the same could be said of Boeing, Oracle, or any number of other companies plunging today.

Sure, general economic concerns would have an impact on all of those businesses, but the value of a $126 billion company like Oracle simply doesn't change that quickly. It's a shoot-first-and-ask-questions-later attitude that means that few sellers today are likely paying much attention at all to what these companies are worth and are instead focusing simply on what the paper stock will be worth a month, a day, or even just 10 seconds hence.

As we at The Motley Fool repeat almost to the point of broken-record status (wait, are we there?), it's this kind of attitude that can create opportunities for investors that put on their Zen caps and look past the whirl of ticker tape to the actual operating businesses that underlie the paper that's being set on fire on days like today.

Want a few ideas to get you started in your search for stocks that have been rashly sold off? My fellow Fools have put together a list of 13 quality dividend-paying companies that they think are worth buying now. Grab a free copy of that report.

The Motley Fool owns shares of Citigroup, Bank of America, Oracle, and Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenhefferowns shares of Bank of America and Barclays but has no financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, where he goes by @KoppTheFool, or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (20) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 18, 2011, at 4:56 PM, JDM62 wrote:

    Great time to be buying for the long term. Especially dividend stocks...

  • Report this Comment On August 18, 2011, at 5:14 PM, teeba11 wrote:

    Added to AMZN and UTX today. Will continue to buy or add to solid companies on the declines. I am looking 20 years out, not to next week.

  • Report this Comment On August 18, 2011, at 5:20 PM, dbtheonly wrote:

    Doubled my stake in KO @$67.51

  • Report this Comment On August 18, 2011, at 6:32 PM, joaquingrech wrote:

    bought more WFC, love it

  • Report this Comment On August 18, 2011, at 6:39 PM, Carioca58 wrote:

    Added F and AFL today at a bargain.

  • Report this Comment On August 18, 2011, at 7:02 PM, hegibson wrote:

    It's like Christmas in August. Buy, buy, buy. Wish I had more money to do so.

  • Report this Comment On August 18, 2011, at 7:06 PM, soycapital wrote:

    wow look at F drop, not good sign short term but just wait and load up.

  • Report this Comment On August 18, 2011, at 8:46 PM, tommyretro wrote:

    Ain't the time to buy -- just look at the index charts. Pretty obvious there's room to fall.

    The time to buy is when we're in a confirmed uptrend. Until then, the smart money is on the sidelines.

    I have to say that the Fool's philosophy regarding market timing is, in periods like this, foolish with a lower-case "f." Even the best companies will fall in a down cycle, so it's wise to wait this out.

  • Report this Comment On August 18, 2011, at 10:14 PM, n4g4 wrote:

    I don't think you can afford to ignore what is happening in Europe and the effect it could have on the market, even if that is only the result of emotional investors. It's not 2008, but there are major red flags being waved. Rumors of bad news are swinging the market into nose dives, while the good news has little lasting effect. At this point it seems there is a lot more to lose than there is to gain. I'm not running out of the market, but I'm certainly not buying.

  • Report this Comment On August 18, 2011, at 10:15 PM, jimmy4040 wrote:

    Very careless post. Irresponsible even

  • Report this Comment On August 18, 2011, at 11:10 PM, kc1628 wrote:

    There will be more room to drop...the macro data is too great that trump over fundamentals in the short term, watch for the gold levels and vix to come down a bit...

  • Report this Comment On August 19, 2011, at 7:34 AM, FocusedG wrote:

    Again - an article of sanity in an insane world. Yes there's potential for additional downside but unless you need your invested money tomorrow to feed your family, it's better to keep looking at it as an opportunity -not a disaster.

  • Report this Comment On August 19, 2011, at 7:42 AM, daveandrae wrote:

    A bear market is like a forest fire, in that It will BURN until it is done burning. You cannot control it, so don't put any energy into it. Only a "fool" would try to "call" the bottom.

    The best thing an investor can do in times like these is to remain Faithful, Patient, and Disciplined. Focus on the things you can control. If you have a dollar cost averaging program, as I do, do NOT abandon it. Instead, double down should the s&p 500 fall more than 30% from its 2007 peak or below a level of 1095.

    Above all, HOLD. Hold when every bone in your body says "get out!" "get into cash!" Hold for just one, more, day. Then Monday, hold for just one, more.

  • Report this Comment On August 19, 2011, at 8:47 AM, marketmaker2100 wrote:

    Surprisingly, I actually do like BAC. However, I like it more from a short-term speculative perspective (http://www.icincome.com/stock/BAC). The risk is still there.

    Furthermore, from my perspective CSX is properly valued. Therefore, I wouldn't spend too much time with that stock (http://www.icincome.com/stock/CSX). This is especially true because its risk characteristics are still somewhat alarming.

    In the short term, F has more room to fall. I would stay away from Ford for now unless you plan on dollar cost averaging (http://www.icincome.com/stock/F).

    I would also like to add that I agree with tommyretro in that the market has more room to fall. Too many organizations are overvalued right now EVEN CONSIDERING what the dow has lost to date. However, there are still amazing buying opportunities out there. Just look around.

  • Report this Comment On August 19, 2011, at 11:19 AM, lowmaple wrote:

    Time to average in Sentiment can change overnight

  • Report this Comment On August 19, 2011, at 11:22 AM, tommyretro wrote:

    I agree there are some buying opportunities out there, but I think trying to buck a trend is risky. I guess I'm still developing my investing philosophy right now, and I'm coming to believe that there are better times to buy than others. I got sucked in when the Dow was at 12,500 and followed some Foolish buy reccs, which I feel don't take the market trends into account (a mistake IMO).

    Also, "buy and hold" is not effective if you bought near the top of a bull market. Better to cut you losses early when a downward trend is confirmed.

  • Report this Comment On August 19, 2011, at 12:30 PM, TMFKopp wrote:

    @tommyretro

    "Also, "buy and hold" is not effective if you bought near the top of a bull market. Better to cut you losses early when a downward trend is confirmed."

    Very little will work if you're buying near the top of a bull market.

    For what it's worth, it's "buy and hold" not "buy stupid and hold blindly." The idea is that investors look for stocks that are priced attractively based on the fundamentals of the underlying company and hang onto those stocks until the price has run up to a point where it's well in excess of what you think the company is worth or the operating company has deteriorated in some way.

    We're not talking about investors randomly buying stocks without regard to the business or price and then brainlessly holding them.

    Matt

  • Report this Comment On August 19, 2011, at 1:46 PM, jimmy4040 wrote:

    Matt:

    Since nearly every CAPS stock has been projected to beat the S&P 500 since the start of the year. I think this statement:

    "We're not talking about investors randomly buying stocks without regard to the business or price and then brainlessly holding them."

    Is at least sometimes true in the converse.

  • Report this Comment On August 19, 2011, at 2:50 PM, dbtheonly wrote:

    daveandrae,

    Wise advice. As Kipling wrote, "If you can keep your head about you..."

    Matt,

    I've been surprised/appalled by the number of persons posting lately that think that "buy & hold" is the equivalent to "fire & forget". I buy & hold, I put in my stops, and I keep learning to see if anything has changed fundamentally. I think I'm following the "Foolish Path"

  • Report this Comment On August 21, 2011, at 7:23 PM, hank321 wrote:

    Corrections like this, historically, are a great time to buy, provided you can wait patiently. And it is terrible time to sell, frankly. But since it is impossible to call a bottom, during dips I buy solid firms, especially dividend firms, on the way down,...but slowly, in modest sums.

    In 2008 I bought MSFT once under 24 in 5 steps,...at 23, 21, 19.25, 17.60, and 15.99 Then sold 3/4 of my stake within 15 months (To get the LT gain), mostly at prices over 29. The best time to buy is when most other folks are selling,...this is not brain surgery. If MSFT hits below 22.99,...I'll buy some again.

    I am looking at CSX, as a 3-5 year holding. I think Ford is a bargain below $10. WFC is also probably in bargain territory at this point. Brk-b pays no dividend,...probably better off with KO or US Bank or JPM.

    Many REITs are still paying good dividends, and this should continue while the FED keeps interest rates near zero.

    I feel no panic,...just quiet determination to stay invested, stay diversified, look for bargains, balance gains with some realized losses for tax purposes at the end of the year. And auto-reinvest the dividends while prices are low. That approach as worked fine for more than 30 years.

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