A Volatile Market Continues

Yesterday the stock market ended up a substantial amount. Today the DOW, Nasdaq and S&P 500 closed down 2.64% 2.70% 2.94% respectively. Ouch. The market technicals look terrible and it would not surprise me if the next 300 to 500 points on the DOW are to the downside.

Professional traders are "trading the volatility". One way to do this is to set up an options straddle using one of the major stock indices. To do this you by a put option and a call option with the same strike price (called an option's "straddle") - let's say $50 strike on the S&P 500 "spider" (SPY). You are betting on a strong move one way or the other. You can close one position for a profit as the market moves one way and then close the other position for profit when the market moves strongly the other way - making money on the volatility of the market instead of betting on it going up or down.

Another way to play a highly volatile market like we are in is to buy weakness and sell strength as the market gyrates around.

Regardless we are in for at least a few more weeks of big swings within a wide trading band. I believe the market will be down tomorrow due to disappointment with earnings by Cisco and AIG. Frankly, Cisco's earnings were excellent, but they did not raise guidance. Cisco continues to be a major beneficiary of the global boom and the continued investment in broadband infrastructure. But while this period of skittishness in the market continues good news will be sold and bad news will be sold huge.

The economic data today was actually very good. But unraveling the credit mess continues to overshadow everything.

High growth big tech continues to hold up better than anything else. The Nasdaq has been up big this year to date but that is a bit deceptive. Something like half of the gain in the Nasdaq is from the big tech growth names such as Research in Motion, Apple, Google, and yes, even Microsoft.

High growth big tech receives a very large percentage of its revenue from international operations (benefiting from the global growth story), is very profitable, have excellent balance sheets, and have zero exposure to mortgage backed securities. No party'n like its 1999.

Energy names except for the integrated energy companies (i.e., Exxon, Chevron), are also doing well as oil grinds inexorably higher to $100 a barrel. There is a growing optimism that refining margins will improve significantly as gas prices rise to be more in line with the rise in oil. I recently added to my refiner positions. Solar power companies have exploded higher as well.

Anything financial, home builder or mortgage related continues to be toxic waste. New York Attorney General Cuomo just went after Washington Mutual for allegedly fraudulent activities in the mortgage market - which is not going to make all of this go away any faster.

The investment banks write down billions daily. The only holdout is Goldman Sachs which seems to feel compelled to issue almost daily denials it will have to write down its portfolio as rumors by the shorts continues to swirl around the Street.

Good luck.

Disclosure: at the time of this posting the author was long RIMM, AAPL, GOOG, MSFT, VLO, TSO and CY.