The Turbulence of August

Last week in the stock market may have seemed unusually turbulent to investors: The Dow lost 100 points early Tuesday then quickly gained it all back, only to drop by 265 points on Wednesday. While it wasn't a good week for the equity markets, and it's dangerous to read too much into the Dow's short-term movements, it's even more dangerous to try to do so in August.

Why? Because far fewer people, both Wall Street professionals and individual investors, are making stock trades during the vacation-heavy month of August. The Dow's volume peaked last week at 4.5 billion shares traded on Wednesday, and at other times during the week it was almost down to 3 billion. But in a really busy time, there can be more than 10 billion shares traded in a day, as there were at one point last May.

What happens when there aren't very many shares being traded? Smaller moves in the market get magnified. Most stocks don't move a whole lot during each trading day, so the more trades are made, the more likely the Dow's movement will regress to the mean, and be damped down. When there are comparatively fewer trades, swings in just a few stocks can cause the entire market to move. That's part of what we saw last week.