Mention stocks and mutual funds at your next get-together and your friends may react as if you were a meth-addled intruder who just kicked in the front door.

Investors are frazzled by the market's volatility, by its lack of direction and by the losses they have incurred since the bear market began about a year ago. Some volatility and investor anxiety is expected within bear markets, but this is unprecedented.

"What we have is free-floating, abject fear" about the stock market, said James Weiss of Weiss Capital Management in Boston. "That is, fear that is not associated with anything specific. But even irrational fear is a motivational force, and it drives investor behavior until it doesn't anymore."

As the quarter closed Tuesday, Washington politicians were trying to explain collateralized debt obligations to the masses with the hope that they would go along with a $700 billion economic rescue plan.

It was comedy as black as tar. Congress hasn't passed the bailout package yet – even though we were told it would help avert economic calamity.

While Washington dithers, the stock market slithers higher on some days and then right back down on others. Consider this: Daily moves of 2 percent or more in the stock market used to be rare. Those kinds of big swings occurred only twice from the end of 2003 until the end of 2006.

Yet there have been 17 such moves in the Standard & Poor's 500 index in just the last three months – the most dramatic being a near 9 percent bloodletting on Monday when the bailout busted.

But true to form, the market bounced back Tuesday, with the S&P 500 climbing 5.3 percent.

As the fourth quarter begins, it appears that average investors remain fearful and lack conviction in the market, and that almost assures the stock market will continue its Sybil impersonation.

"I don't think we are looking at financial Armageddon, because there is a tremendous amount of cash and capital out there," Mr. Weiss said. "But we have to get confidence restored to our financial system."

Earlier this year, big market moves were often triggered by the release of economic data, such as the unemployment rate, housing starts or inflation. Any indication that the economy would not lapse into recession brought the bulls into the market.

Conversely, any indication that the economy was either in or close to recession brought a wave of selling. That kind of economic uncertainty rattles the market, but that was just the prelude to the volatility that was yet to come.

The wild market swings of the last three months are almost all related to the fears about the dysfunction in the credit markets and the stability of the U.S. banking system.

This credit crisis that first surfaced about a year ago left some of Wall Street's most powerful, prestigious investment banks in shambles and many investors feeling helpless and afraid.

The nation's banks, brokerage firms and mortgage companies got into deep trouble by holding too much worthless – or almost worthless – mortgage debt.

Some failed and some were left to slurp at the government trough to even survive.

The government took over Fannie Mae and Freddie Mac, the mortgage finance companies, in early September, and banks and mortgage lenders remain tepid lenders. With Fannie and Freddie under government control, the real estate industry is at least hoping that lending standards will be somewhat relaxed and the housing industry will stabilize.

Still, the nation's financial system remains suspect, with the near-collapse of earnings at most major investment banks and the total collapse of several others. The latest casualty was Friday, when Washington Mutual Inc. became the largest bank ever to fail in the nation's history.

Just a few days before, on Sept. 15, Lehman Brothers Group Inc., Wall Street's fourth-largest investment bank, filed a Chapter 11 bankruptcy petition after all potential buyers walked away.

On the same day, one of Wall Street's most storied firms, Merrill Lynch & Co., was snapped up by Bank of America in a $50 billion stock deal.

And if that weren't enough, the Federal Reserve on Sept. 16 gave the world's largest insurance company, American International Group, a two-year, $85 billion loan in exchange for an 80 percent stake in the company. On that news, the Dow Jones industrial average dropped 450 points.

Apparently that was the last straw for the government straw bosses, U.S. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and others. On Sept. 19, Mr. Paulson announced a plan to excise bad mortgage debt from the balance sheets of the troubled Wall Street firms. The Dow rallied more than 700 points over two days on that news.

"Never underestimate the determination of the U.S. Treasury or the money-printing power of the Federal Reserve," said James Stack, a money manager and market strategist at InvesTech Research.

If the government's plan to relieve the nation's banking system of bad mortgages is eventually approved, it should bring some stability back to the economy, the banking system and the stock market, said Marc Pado, market strategist at Cantor Fitzgerald in Los Angeles.

It would allow banks to clear these illiquid assets, mortgage-backed securities, off their books by selling them to the government. With that underbrush cleared away, Mr. Pado said, banks would be more inclined to extend loans to individuals, small businesses and corporations. And credit is the mother's milk of a growing economy.

But that's only half the story. If the interest rates on some of these mortgages can be renegotiated lower, many homeowners might be able to make the payments, and that would stabilize the drop in home prices, he said.

"I think what we are looking at without this plan is really overshooting to the downside where home prices are going," Mr. Pado said.

The troubled housing industry will continue to be a major headwind for the economy and stock market. In fact, it lies at the heart of the financial crisis.

U.S. home sales are expected to fall about 11 percent in 2008 compared with last year. Home prices in the nation's 20 largest cities dropped a record 16.3 percent in July from the same period a year ago.

To make matters worse, there is about an 11-month backlog of existing homes on the market. Opinions differ on how long it will take for the housing market to stabilize, but another year is as good a guess as any.

While the market sold off Monday on news of the failed bailout, those who think government intervention will result in a quick turnaround for the economy, the market or for the financial sector may be disappointed.

When the Resolution Trust Corp. opened in 1989 to deal with the savings and loan crisis, the economy didn't turn around for two years and the stock market dropped for another year.

In other words, investors who missed any recent rallies don't need to be particularly worried, Mr. Stack said.

"I don't think we are going to see a runaway bull market anytime soon," he said. "It probably will unfold much like 1988 after the '87 crash. We should get a slow increase in confidence."

The scary headlines notwithstanding, many savvy market strategists and money managers agree on three issues that relate to smart investing in troubled times.

Bull markets are born during periods when things look the worst. That makes sense, because the stock market will hit bottom "during the point of maximum pessimism on Wall Street," Mr. Stack said.

This was the case during the 1973-74 and 2000-02 bear markets – the two largest in 50 years. Headlines from those periods looked much as they do today.

"The slide is steep with no end in sight," shrieked a Business Week headline on Jan. 13, 1975, just as the market was about to start a new bull run. Similarly, The Associated Press ran a story on Oct. 15, 2002, saying that most Americans had lost faith in the stock market, just as another great bull market began.

That doesn't mean investors today should get neck-deep in stocks now, but they at least should be aware that the smart money guys are already on the prowl. They always seem to buy when everyone else is selling, and Warren Buffett's recent $5 billion stake in Goldman Sachs Group Inc. is a good example of that.

Mr. Stack and other money managers also are beginning to convert some of their large cash positions and are moving slowly back into stocks.

"Today, all bearish extremes are again in place for one of those best-buying opportunities that typically comes around every three to seven years," Mr. Stack said.

The stock market always overdoes it, going up and going down. Stocks obviously were not worth the kinds of prices they fetched during the dot-com era of the late 1990s. Conversely, today with the major stock averages down more than 25 percent from their highs, the majority of stock experts believe the market has lopped off too much of the value of some well-managed companies.

"The stock market is made up of mere mortals who are controlled by greed and fear," said Al Goldman, chief market strategist at Wachovia Securities. "Greed goes to the extreme like it did in the late 1990s, and now fear has gone to the extreme. We are not machines. This is just human nature."

The point of all this is that fear, even irrational fear, can continue to drive the market down. That is why average investors shouldn't dive back into these volatile waters. There is no need to hurry; let more time pass and more clarity come first, said Mr. Weiss of Weiss Capital.

"Stepping into this situation to buy aggressively is not investing," he said. "It is more appropriate to buy as issues are rallying off the bottom in a clarified environment."

When that clarity comes, stocks can move higher rapidly and recover previous losses, he said. But at the moment, the investing landscape is littered with land mines.

"Stock valuations are good, but do you want to make the bet that you can make it through the mine field without being blown up?" Mr. Weiss asked.

By clarity, Mr. Weiss said he means he wants the nation's financial sector to stabilize, housing prices to stop dropping and corporate earnings to turn positive.

Average investors should not change their investing strategy based on who they think will win the White House in November.

Some people argue that the economy does better under Democratic leadership, while others make an equally strong argument that things are better under Republicans. You can make a good argument for either case, depending on what time frame is used.

Although it's true that political leaders can influence tax policy, regulations and spending, which in turn can affect the economy, predicting the outcome of these factors is next to impossible.

Some investors might want to make the bet that if Barack Obama wins the presidency, stock prices of defense contractors will fall as we withdraw our forces from Iraq and spend less on the military.

Some might want to take stock positions in pharmaceutical companies in the belief that if John McCain wins, he will be less intrusive into how the drug makers set prices.

Alan Skrainka, chief market strategist at Edward Jones, recently addressed campaign promises in a report to clients: "Politicians make many promises, and a lot of them never become reality. That's partly because our system of checks and balances will often reject ideas that are overly ambitious. We believe that over the long term, market forces are more powerful than political forces."