Please help me understand how this works....

My domain is 3 years old and I am targetting a medium competition keyword.

This time last month I had 2,500 backlinks according to Webmaster Tools. I now have 3,500 yet my SERP for this keyword has dropped from #21 to #27 over the last few days. Nothing else has changed apart from adding a few more pages onto my site.

How does this work? Is there a reason for this? The links are all blog comments, directory submissions, web 2.0 properties etc - all unique comments/articles written by hand...

There are a lot more elements regarding your SEO than simply the backlink profile and strategy used. How are your pages optimized, have you done proper research for your keywords? Have you looked into your competitors to see what's been working for them? Think out of the box a little, it will pay off.

Hi, concentrate on your onpage. Make your content more user friendly with keyword density 3%. And for off page only go for social share and nothing else. I have seen many site were penalized because of massive directory submission.