Market motion sickness to continue

The Dow soared nearly 900 points Tuesday. Experts say investors need to prepare for more big moves - both up and down - in the coming months.

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By Paul R. La Monica, CNNMoney.com editor at large

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The Dow has suffered big drops and enjoyed large gains in what's been a rocky October.

NEW YORK (CNNMoney.com) -- Don't get too excited: The Dow may have surged nearly 11% on Tuesday, but we've been here before...just two weeks ago.

On Oct. 13, the Dow jumped 936 points, and then went on to shed more than 1,200 points, or 13%, in the days before yesterday's big move.

The plain fact is, massive selling will lead to occasional massive pops.

Peter Sorrentino, senior portfolio manager with Huntington Asset Advisors in Cincinnati, said that many mutual funds and hedge funds have been forced to sell stocks because they face looming redemptions, i.e. investors demanding their money.

But at the same time, whenever there is even a whiff of a rally, other investors that have piles of cash waiting to invest may need to jump in and buy due to fear of missing a big move upwards.

"The hedge funds are still out there. Many are forced sellers and they have no choice. But there are also people that have gone to cash who are left at the dock and are afraid that the boat is going to set sail," Sorrentino said.

With that in mind, it's hard to make sense of where the market is headed in the near-term as long as it remains this tumultuous. And so far this month, just about every day has seen either a big gain or a huge loss.

The Dow has experienced a move of at least 100 points in 18 of the 20 trading days in October, as well as in each of the past 11 sessions.

It's going to be tough to declare that the market has finally bottomed out until stocks finally stop shooting up and down so violently.

"It's encouraging to see that we don't plunge day after day but it's still disconcerting that volatility remains this high," said Sorrentino. "Investors can't believe in the rally until the volatility goes away."

We are undeniably in a bear market and, it seems apparent that we are in a recession - even though the National Bureau of Economic Research has yet to declare it as such.

But as I've written consistently in the past few months, I do think that there are signs of hope that a recovery will soon be in the cards. This may be a longer and more painful recession than most but it's still a recession, not a depression.

The government's controversial bank bailout plan has slowly started to loosen up the gummed-up credit markets. That's a good thing.

Investments in stronger banks by the Treasury Department may also encourage consolidation. Weeding out the weak banks is also a good thing.

And the Fed cut rates again this afternoon, which should also eventually help get the credit markets back on track.

Still, any reasonable investor should realize that it may take months for the bailout, as well as all the Fed's previous rate cuts, to truly work their magic and stimulate the borrowing and lending activity that is crucial to a growing economy.

But just because they aren't working overnight doesn't mean that they are a failure.

"There is starting to be a sense that it will take time for all this to work out. There have been ounces of medicine and the market is digesting a pound of cure," said Matthew Lloyd, chief investment strategist of Advisors Asset Management, an institutional investment firm based in Monument, Colo.

Lloyd added that even though it would be premature to declare that yesterday's stock surge is a sign that the worst is over, it is still a good sign that some investors appear to be out there bargain hunting since many stocks are trading at attractive valuations.

"At least there's money out there that's willing to come in and buy at certain levels. It gives us some consolation that the bottom may be near," he said.

Bill Stone, chief investment strategist for PNC Wealth Management in Philadelphia, agreed. He pointed out that stocks rallied yesterday despite more evidence that housing prices are continuing to fall and a report showing that consumer confidence dropped to its lowest level in history.

"You can't really spin a big up day into that much of a worrisome sign. One thing's for sure. We were so oversold that the spring was coiled for a rally," Stone said.

"Eventually, all the bad news will be priced in and the selling will have exhausted itself. It's impossible to know when but the market likely will move before economic data gets better," he added.

What that means is that is probably a great time to buy stocks for the long-term. You just have to resist the urge to check on how your portfolio is doing every 10 minutes.

A lot of traders will make impulsive moves. Investors, however, should recognize that stocks are probably going to keep spinning wildly, like those cups in Disney World's Mad Tea Party ride.

"When you get in periods like this where people are trying to figure out where the bottom is, emotions start to drive things," said Jason Tyler, senior vice president and director of research operations with Ariel Capital Management, an institutional investment firm in Chicago.

"We have to get used to a prolonged period of volatility for the next several months."  To top of page

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