Volatility is Ruling the Stock Market

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The main characteristic of equity markets right now is volatility.

If you take a look at a daily chart of the S&P 500 Index since the beginning of 2009, you can see it immediately. The S&P bottomed in March 2009, then played the bouncing upward game for most of the rest of the year, looking like a Slinky toy going up the stairs rather than down.


After the January 2010 correction, the Index got back on track in February and rallied beautifully through the end of April.

At that point, the bears got a grip on the market and pulled it right back to its February lows.

But the more important thing to see in the S&P chart is that the intraday swings got much, much bigger, indicating a growing disagreement between those who think the market will go up more and those who are betting that it will go down.

Volatility is what you get when you have a devoted group of market optimists fighting it out with an equally committed group of pessimists.

I won't go through the competing scenarios that each group paints to support their vision of the market's future. The scenarios for both a major market meltdown and another big rally make perfect sense.

But one of them has to be wrong, at least in the short term.

There are actually three possible ways the market can go from here. They are up, down and sideways, which would mean more of this hacking around without a central tendency.

If you feel yourself drawn to either the bulls or the bears, the optimists or the pessimists, and if you're moved to put a lot of money behind your bet, here's my advice. Don't.

Remember what I keep telling you: The market wants to take your money.

If we get a new rally in the stock market, it's likely to be a relatively narrow one, with more and more money pouring into the most popular names. And for subscribers to our growth newsletters, Cabot will be happy to tell you what those names are.

We will also be happy to tell you when to get into cash if the market heads for the deep end.

So try to be like a good World Cup goalie. Ignore the head fakes and the temptation to anticipate what's happening. Be patient and wait until the real move becomes clear. Then react with purpose.


---

My favorite story out of China in recent months has nothing to do with investments or growth stocks. It's part "dumb criminal" story and part tragicomedy. And the amazing thing is that I heard absolutely nothing about the story when it first broke.

It all began when a vault manager in the Handan branch of the Agricultural Bank of China came up with a bright idea in October 2006. (Handan is an industrial city of 1.4 million in Hebei Province, about 250 miles south of Beijing.) With the "cooperation" of a couple of security guards, he decided, to "borrow" 200,000 yuan (about $26,000) from the bank's vault and buy lottery tickets with it. His plan was to win enough that he could replace the money and keep the excess winnings for himself.

Not a wise plan, you might be thinking, but good enough for our manager friend.

And the weird thing is that it worked!

The manager replaced the 200,000 yuan, and that might have been the end of it. (I have no idea how much his excess winnings were.)

Unfortunately, having successfully confirmed the viability of his scheme to his own satisfaction, the manager decided to go after some real money.

He enlisted another manager, and together they walked out of the bank with nearly 33 million yuan (about $4.3 million), of which they immediately dropped 31.3 million on more lottery tickets. But this time luck was against them, and they won basically zilch.

As so often happens when a poorly considered sure thing goes wrong, the manager and his friend must have panicked. They figured that their only way out of the mess was ... wait for it! ... to steal more money!

This time they walked out with 18 million yuan (about $2.3 million), and immediately poured 14 million into lottery tickets in a single day. And almost needless to say, their luck stayed bad, resulting in a return of just 98,000 yuan.

When their massive embezzlement was discovered, our heroes did the only logical thing, which is to buy fake IDs and used cars and hit the road. Unfortunately, China isn't a place where desperadoes can take to the open road and disappear into legend.

The managers were found within two days and charged with misappropriating public funds (because the Ag Bank of China is a state institution). And here's where the tragic note comes into the composition.

The two were executed on April 1, 2008, which may be a bit of cosmic calendar irony.

I haven't used the men's names because I don't think non-violent crimes deserve the death penalty, but that's a personal thing. I don't mean to mock people whose real crime was embarrassing the state.

Is there a moral for this story? I don't know. There's probably a lesson in there somewhere about not letting a statistical improbability (the first manager's big lottery win) convince you that statistics don't matter.

But sticking to the topic of crime ...

I have a lawyer friend in Arkansas who switched from being a defense lawyer to the prosecutor's office. I think he just got tired of defending people who were, for the most part, guilty as heck. I love his line about crime, which is, "There are really only two crimes, misdemeanor stupidity and felony stupidity."

---

Big investment companies love consistent revenue and earnings growth, especially because this consistency allows them to project future growth with confidence. When you're trying to predict anything about the future, confidence is a precious commodity.

Longtop Financial Technology ( LFT ) is a Chinese provider of software and IT solutions to the financial sector in China. The company's products help run bank teller machines (ATMs), control customer relationship management ( CRM ) and let financial firms mine customer information for information that will enhance revenue and increase client satisfaction. The company also just signed an agreement with Netezza ( NZ ) to provide integrated data warehousing services in China.

The bottom line, though, is the bottom line, which has been growing steadily for a long time. Both revenue and earnings have each been growing at a 30% or better rate for the last 11 quarters. (OK, so Q3 2009 earnings were up only 29%. Don't get picky!)

The company has no debt to speak of and the forward P/E of 21 seems entirely reasonable, given the growth of the Chinese financial sector.

The chart for LFT shows a stock that has been drifting slowly downward since January, but has caught an upwind since June 9 and is now trading above its 25- and 50-day moving averages on rising volume.

I had LFT in the Cabot China & Emerging Market Report portfolio in April, following a short stay on our Watch List. We sold it for a small profit in July after the stock corrected from 29 to 22. If this rally continues, it may make another trip to the Watch List. Then we'll see.

Sincerely,

Paul Goodwin

For Cabot Wealth Advisory



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: CRM , LFT , NZ

Cabot Heritage Corporation

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