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Choppier Markets for Rest of 2010?

What’s ahead? Traders expecting choppier markets for the rest of the year.

Remember what happened: going into May, traders were not only long the market, they were short volatility.

Buying stocks and selling volatility is really a double bet on the market. Now the volatility bets are off. They were forced to buy volatility for the past couple weeks, culminating in a buying frenzy this week.

Now they are likely to be looking for a level to SELL volatility. How about 48 — where the CBOE Volatility Index (VIX) opened this morning, the highest level since early 2009? That's a good level to start thinking about it.

One thing's for sure: the easy money has been made. The rally that began in March 2009 is now old. It can still advance, but odds are it will be choppier. While volatility might be high now, few expect the VIX to get out of the 30s in the near term.

The good news:

1) markets are much lower, making prices more attractive. International is on sale: Brazil at lowest levels since September, China at 52-week low.

2) Hedge fund positions are much smaller than they were even a month ago. And they are likely to be careful about throwing a lot more money in immediately. Why?

a) seasonally weak period,

b) too much regulatory/economic risk,

c) they don't have to, at least not right away.

Why don't they have to? Take an average size fund of $3 billion; a lot of these guys were up 8-12 percent for the year a few weeks ago; they were up 15-20 percent last year.

Once the craziness hit on May 6, they began reducing positions. These guys are still up on the year, and they can afford to sit back for a few more months and see how things are settling out.

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Dow Top Percentage Gainers:
(as of this writing)

JPMorgan Chase

Bank of America

America Express

Walt Disney

Boeing

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