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Market Intelligence: Volatility, Crude, Nokia,  Railroad Downgrade

The huge market swings yesterday--including a 200 point rebound in the Dow during the last half hour--may have had some traders chugging Maalox. But others thrive on the roller-coaster ride.

Don't look for the big ups and downs to stop anytime soon.

Volatility as measured by the Chicago Board Options Exchange Volatility Index (VIX) "is too high for the market to get a respite from big daily trading ranges," says Andrew Bekoff, chief investment strategist at Printz Capital Management. "As credit market worries hold center court, volatility is sure to remain elevated from the ripple effects and anxieties which traders are taking full advantage of."

Bekoff also reminds that in addition to overall market volatility, the Dow average itself magnifies individual moves made by the 30 stocks that make up the $4.3 trillion blue chip indicator.

"The Dow divisor is down to point-12 these days, meaning that a one point move in a single component of the Dow moves the whole average by 8 points."

Over the years the Dow divisor has fallen to adjust for stock splits among individual companies that make up the Dow.

Bekoff says, however, that overall market volatility is the biggest part of the story, "and right now the high VIX will cause big market swings 2 or 3 times a day, or more."

Bekoff says it will likely take a VIX decline below 20 to spur a longer lasting stock market rebound.

Those market swings point to the need to hedge gyrating equity positions.

"There are many ways to hedge an equity exposure with options," says Bud Haslett, director of option analytics at Miller Tabak. "These include purchasing puts, constructing collars, selling calls and numerous other strategies."

The subject of using options to protect your portfolio will be covered today on CNBC's "Power Lunch".

Haslett says a popular method to use in hedging is to buy exposure to volatility because of the negative correlation between indexes like the VIX and stock returns.

"The consistently high negative correlation between equity prices and volatility leads to many important hedging benefits," says Haslett who adds that with "various options and volatility products to hedge your equity exposures, there is no reason to get blind-sided the next time the stock market takes a tumble."

Going beyond the emotional swings of the market, McMillan Analysis president, Larry McMillan says the 1490 level of the S&P 500 remains upward resistance, while support remains in the 1460 area.

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McMillan says further rally attempts are possible, but warns, "we would expect the lows to be tested and perhaps violated, before a true intermediate-term bottom is in place."

He also says that many individual stock charts look worse than what he calls the "2002 debacle". Says McMillan, "a majority of (the charts) have experienced a waterfall decline and would need much work before they can resume rising again."

Nokia

Nokia posted the barn-burner quarterly results of the day with stronger than expected earnings, revenue and margins. The company is the world's largest maker of mobile phones, shipping more than 100 million phones last quarter.

100 million phones shipped in a quarter points to the rapidly growing global demand for phones in places like China where there are now more mobile phones than people living in Europe.

Francine Hardaway's Blog, in a post entitled "Shift Happens Exponentially...", cites this metric from talk by Joe Schoendorf of Accel Partners:

"It took 2 decades to sell the first billion mobile phones, 1400 days to sell the second billion, and under 1000 days to sell the third billion."

Crude Oil

Seemingly bullish crude inventory data on Wednesday - featuring a steep decline in inventories - was met with heavy selling as crude finished $2 below its intraday all time high.

Schork Report editor Stephen Schork says one must "respect" that the market didn't share the viewpoint that the inventory numbers were bullish. But he also notes a technical glitch left the NYMEX's electronic price reporting platform briefly frozen after the inventory report was released.

"Electronic traders who bought WTI in the wake of that 'bullish' DOE report were unaware the market had faded off of its highs," according to Schork who says "that must have been quite a shock".

"We know it was to a few of our clients," says Schork. "Over the next hour, spot WTI plunged another $1.70. We are left to wonder how much of yesterday’s 'weakness' was simply panicked selling after DOE-bulls suddenly realized their length was much further out-of-the-money than they thought."

Schork says his bias on crude remains bullish, though he says he would reconsider if crude fell below the important "July 25th pivot low of $74.63".

Analyst Actions

Norfolk Southern has been downgraded to Buy from Strong Buy at Matrix which cites lower rail traffic due to weak auto sales and a decline in housing related materials.

Qwest gets an upgrade to Sector Outperform from Sector Performer at CIBC.

Merrill Lynch downgraded Electronic Data Systems to Neutral from Buy citing an outlook following earnings for lowered free cash flow.

CIBC ups Broadcom to Sector Outperform believing the company will see new growth opportunities from a variety of business segments including Bluetooth.

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