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

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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 (NYS: BAC) and Citigroup (NYS: C) may be in worse shape than they're letting on.
  • There are concerns that European banks like Barclays (NYS: BCS) and Lloyds Banking Group (NYS: 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 (NYS: EMC) loss peaked at 12% and Oracle gave up as much as 10%. Boeing (NYS: BA) , Freeport-McMoRan (NYS: FCX) , and Deere (NYS: 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 (NYS: CSX) the company fell 6% today or that Ford (NYS: 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.

At the time this article was published The Motley Fool owns shares of Citigroup, Bank of America, Oracle, and Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.Fool contributorMatt 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 hisCAPS portfolio, or you can follow Matt on Twitter, where he goes by@KoppTheFool, orFacebook. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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