Embrace The Market Volatility

NEWS: The major indices closed lower today with the NASDAQ showing relative strength versus its peers. The Dow finished with a loss of 205 points or 1.8% and is basically unchanged on the week. The move today marked the fourth consecutive triple-digit gain/loss. The S&P 500 fell 17 points or 1.3% on the session. Technology held up well and the NASDAQ only gave back 4 points or 0.2%. The Russell 2000 showed some strength in the small-caps, relatively speaking, only falling 0.6%. THE BOTTOMLINE: Weaker oil today was not enough to spur on a third consecutive day of buying for the bulls. The weaker than expected GDP number and dramatic rise in weekly unemployment claims weighed on the futures before the opening bell rang. However, within a few hours the S&P 500 was able to peak its head into positive territory for a few minutes before falling back.

A late-day rally was thwarted during the last hour when Big-Mouth Alan Greenspan was looking to prop up his book sales. The guy in charge before Bernanke made his 50/50 recession comments again. Wow, what a genius. He is giving us a coin toss chance of a recession. He needs to wither away into the abyss and leave the Fed to the man in charge. This situation reminds of another ex-legend that refuses to retire and enjoy life, instead they must always be the center of attention - think Brett Favre! Maybe they can share a timeshare in Cabo.

EMBRACE VOLATILITY

NEWS: Four straight days of triple-digit moves for the Dow; 12 of the 22 days in July were three-baggers. There was a 55% chance when you woke up in July that the Dow would either be up or down at least 100 points!

THE BOTTOMLINE: This is not the first time we have seen a pickup in volatility in the market, in June there were 11 triple-digit days for the Dow. Last year in July there were 8 such days, therefore a 50% increase in a year. And keep in mind the Dow was 2000 points higher last year at this time. In 2006 there was 7 trifecta days, so there is a clear pattern of more volatility entering the market.

In August 2006 there was 1 triple-digit day and last August we saw 14; quite the increase. When there is news to be traded in the summer as there was last year the market can experience violent swings. This year there is no lack of news, from the credit crisis, earnings, a possible recession, oil trading at lofty levels, and how about a presidential election. What I am trying to say in a nice way is that it is fair to expect more volatility in the coming month.

The VIX spiked to nearly 31 in July and last August the volatility indicator spiked to a multi-year high at the time, 37.50. It would not surprise me if the market puts together another spike in volatility and possibly the capitulation everyone is looking for before rallying into the election. Even though we may not be comfortable with volatility as long-term investors, ignoring it will not help the situation. Embrace it and when possible try and use it in your favor. When stocks/ETFs you are looking to enter spike down to support, take a chance and buy a little for a long-term play.

THE DAILY ETF UPDATE - BIOTECH BONANZA

NEWS: Another merger in the biotech sector sent the biotech ETFs higher today, led by one of the holdings in our Moderate Portfolio, the SPDRs S&P Biotech ETF (XBI). The gain of 5.1% was the biggest daily jump of the year. The ETF is now up 16.5% in 2008 and one of our top performers for the newsletter as well as our Portfolio Management Clients.

THE BOTTOMLINE: Two thoughts I want to pass along to you tonight. One, the Biotech sector has officially broken out and can be bought on pullbacks in the coming weeks. I would not chance a Biotech ETF at current levels because they are all overbought and due for a natural pullback. The second thought has to do with the 5 biotech ETFs we track here at PFG. Here are the returns for the 5 ETFs today: +5.1%, +3.9%, +3.9%, +2.0%, and +0.7%. It is clear you must do your homework before throwing money at any ETF that has Biotech in its name.

To give you a perspective I looked at the 2008 returns for all 5 and they ranged from +25% to +6%. Annualized out that is a difference of over 30% per year. Let the ETF Bulletin do the homework for you - our Aggressive Portfolio has bucked the negative trend, embraced the volatility and is up over 5% on the year!

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