Three Reasons Why Stocks Have Become So Volatile

Forced Liquidations

"Forced liquidation" is a term on the lips of many market pros, though it may not be something average investors consider very often. That's because the term only applies to the biggest risk-takers—the ones who now seem to be having, because of reduced volume, the most influence on moving the markets.

Traders using leverage to take positions in the market are getting hammered by the changing conditions and are being forced—through margin calls—to liquidate their positions to raise cash to meet their obligations. These orders usually don't come until near the end of the trading day, and they wreak havoc on a market looking for stable ground.

"I believe at this stage everybody who has wanted to sell has sold already and what is left right now—and we'll only hear about this in the future when the story comes out—is the forced liquidations taking place both in hedge funds and mutual funds," says Kimmel, who does not use leverage in the funds he manages.

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"You're seeing a lot of pressure from the liquidation side," he continues. "I don't think this is as fear-driven as it was, say, a few weeks ago. Now it's a question of some healing has already begun but you definitely have some guys leaving funds and that's not to be unexpected at the bottom."

How to Invest

The word "nimble" comes up often when asking investment advisors their strategy in such an environment.

Krosby calls it "the operative verb in this environment" while Sparks also uses the word freely and says being able to turn on a dime when it comes to investing poses unique challenges.

"It requires being nimble more so than in any other market environment that I can remember," he says. "You need to have very tight stops in place."

But the wild swings in the market—the CBOE Volatility Index has soared to previously unimaginable highs—provide opportunity as well.

"Long-term investors or institutional investors will take advantage of a down market to build their positions," Krosby says. "They don't build their positions in one fell swoop. You will take advantage of a selloff, especially if you realize it's more based on rumors or fund liquidating. It helps you in building your positions."

For Kimmel, this has all been the part of constructing a bottom that ultimately will lead to better times ahead.

"The value has been created, the public has been rattled. That's how you end up getting good valuations," he says. "This is how bear markets always end, with a distrust of Wall Street, with a distrust of corporate governance. I believe we were served up a fat, slow pitch and the doom-and-gloomers have been right for a short period of time. Then they'll go away again."

© 2012 CNBC.com

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