Stocks rallied Aug. 8, with the Dow Jones industrial average up more than 300 points -- a jump of 2.65% -- and the Standard & Poor's 500-stock index gaining 2.4%.

A rally like that might look like a decisive move higher, but this summer it seems almost routine. In the past 10 days alone, the Dow has seen triple-digit swings up or down on seven days, including Aug. 5, when the blue chip benchmark dropped 332 points.

Laid out on a chart, the summer's stock movements look like the teeth of a saw: repeated, sharp moves up, then down, then up again.

Investors Are Stumped Despite the wild ride, stocks have gone nowhere in the past six weeks. More than a week into August, the S&P 500 trades almost exactly at the same level as late June.

"It's crazy," says Dave Rovelli, managing director for equity trading at Canaccord Adams. What's driving this wild ride? "I don't think anybody knows what to do," he says.

Many long-term investors seem to be leaving their money on the sidelines, while they waver between optimism and pessimism. Meanwhile, short-term traders jump at every piece of news, pushing the market hard in one direction for a day or less, says Jerry Webman, chief economist at OppenheimerFunds.

Lifting investors' spirits every few days have been frequent drops in the price of oil. A month ago, crude oil was trading above $147 per barrel. On Aug. 8, it settled just above $115 per barrel.

Yet the persistent financial crisis continues to weigh on the market. After reporting huge losses, three giant financial firms saw shares plunge on three successive days: Mortgage financier Freddie Mac (FRE) dropped 19.3% on Aug. 6; insurer AIG (AIG) fell 18% on Aug. 7; and Fannie Mae (FNM) fell 9% on Aug. 8. Now that's volatility.

The stock market tends to look ahead to the future -- but that future's hazy now.

An Economic Turning Point The U.S. and world economies seem to be at "turning points," Webman says. It's hard to grasp the complexities of the financial system's distress or the stress on the world economy. "We are seeing things that we don't know how to find past models for," Webman says.

In the U.S., the economy is weak -- but how weak and for how long? "If we're going to come out of the recession in six months, you want to be buying stocks now," Rovelli says.

Brian Gendreau, investment strategist at ING Investment Management, is one of the many on Wall Street who have taken a wait-and-see approach to the market this summer. Since oil prices are very hard to predict, he sees it as "very dangerous" that "the market [was] driven by oil prices and nothing else." On other fundamental measures, there are also big question marks this summer. The current economy seems weak, but the outlook for corporate earnings is "surprisingly good," Gendreau says, and the economy may improve in 2009.

The daily headlines from the stock market are no doubt confusing to the public and retail investors. For traders, volatility offers opportunity for gains if they can quickly enter and exit stocks at the right times. "But it's horrible for people who have their life savings in the market," Rovelli says. "It makes them very nervous."

By contrast, market pros don't appear particularly nervous.

Calm amid Chaos Despite stocks' wild swings from day to day, there has been no spike in the VIX, a market volatility index based on the options traded on the S&P 500 that often reflects the level of fear and panic in the market. The VIX hit a recent high of 32.24 on Mar. 17, after the collapse of investment bank Bear Stearns. And it rose above 28 in early July amid worries about Freddie Mac and Fannie Mae.

But the VIX, which trades on the Chicago Board Options Exchange, was barely above 20 on Aug. 8, three points below the past year's average.

The lack of fear may reflect confidence among professionals that, eventually, the stock market will settle down and find a direction. Looking at the VIX, "one would have to conclude that this period of high volatility is temporary," ING's Gendreau says. He expects to change his "neutral stance" in a few weeks when the outlook clears a bit.

In the meantime, "people should not be trying to watch the market with a magnifying lens," Webman says. Investors should be focusing on the long-term trends that they believe are going to create wealth in future years -- not the daily headlines, he says.

There's a chance the market still has some wild oats to sow. Gendreau warns that the fall Presidential election campaign could add to the uncertainty.

Before Labor Day weekend, there are still a few more weeks of hot weather, long days, and relaxing vacations. But on Wall Street, the waning days of summer should be anything but lazy and quiet.

Story Source: Business Week