Dow Jones roller coaster finishes higher. What made the stock market so wild?

The stock market has taken investors on a wild ride. After plunging Thursday, the Dow Jones swung through a 416-point range Friday before finishing up almost 61. One reason for the behavior is investor fear.

To investors, the last few days have felt like one giant whipsaw.

The stock market has become so volatile it’s hard to keep up with what side of the roller coaster it’s on. One minute the Dow Jones Industrial Average is adding 100 points. A few minutes later, it sheds those points and loses 150 more.

Friday seemed like an extreme case of the ups and downs.

The Dow closed with a gain of 60.93 after falling almost 513 points on Thursday. But, to get there, it swung through a range of 416 points between its low and high. Sometimes the average moved 50 points in thirty seconds.

The NASDAQ average was down as much as 1.4 percent and up as much 3.6 percent all in one session.

“We’re telling people to just be patient, the market will change its mood every few minutes,” says Phil Flynn, senior market analyst at PFG Best Research in Chicago.

So, what does it mean when the stock market is this wild?

Experienced investors say part of the reason for the sharp movements is the uncertainty about whether the economy is going to experience another recession.

At the same time, almost 70 percent of the trades in the market are now done by computers, which are trying to detect some of these short term trading trends. The computers move stocks so fast, only other computers can keep up with them.

“It’s a matter of trade first and ask questions later,” says Mark Lamkin, CEO of Lamkin Wealth Management in Louisville, Ky.

One measure of how sharp the swings have become can be seen on the Chicago Board of Options Exchange, where investors trade something called the VIX, an index that measures volatility. Mr. Flynn calls it the “fear index.”

When the index rises, it indicates investors have more concerns. When it drops, they are less worried. On Friday, it had a 43 percent swing higher. In the past two days it has risen by almost 60 percent.

In yet another indicator of how the volatility is causing distortions in the marketplace, short-term interest rates moved into negative territory on Thursday when the market was cratering. So much money flowed out of the markets so fast that investors were willing to pay the government to hold their cash.

Mr. Lamkin, who manages $250 million in assets, says some of his portfolios went to 90 percent cash on Monday. For more conservative investors – the buy-and-hold types – he sold half their portfolios to cut risk.

On Friday, the Bank of New York Mellon announced it would start to charge customers for holding $50 million or more of cash since the bank itself was losing money by holding the money.

But, the largest cause of the volatility, says Lamkin, is that the economy is at an inflection point. “We are literally at the precipice of finding out if we are going to have a double dip recession,” he says. “We’re so close to figuring it out.”

Flynn thinks the volatility is because of the wild swings in confidence. For example, after the July jobs numbers came out – showing a gain of 117,000 jobs, better than expected – investors became more confident that the economy was not headed for a recession. Then, Flynn says, investors started to worry about problems in Europe again and the market sunk.

“Then, in Italy, Berlusconi said he would make some deals, there would be some kind of bailout of Italy, and the market went back up,” says Flynn. “We’re not out of the woods yet, but it did seem to provide some kind of confidence for investors.”

How are ordinary investors taking it all?

“I was calling my clients all day and I was surprised at how few were truly worried,” says Peter Maris, a certified financial planner with Resource Financial Group in Wilmette, Ill. and a twenty-year veteran of the financial markets. “They were more worried about me – how I was taking it.”