Is the stock market becoming more volatile?

Last Friday's breathtaking 281 point plunge in the Dow, followed by yesterday's 286 point rise, would certainly lead us to think so. If you take a short term perspective it's hard to argue that things haven't suddenly become much more volatile more recently.

I created the chart below to give a near term perspective on stock market volatility. The chart holds 4 data plots. There are two data plots - the thin lines - and two moving average plots - the heavier lines. The thin lines are daily return absolute values. The thick lines are the 5-day moving averages of the daily returns lines. Moving average charts are simply a way to smooth out data to give you a look at near term trends.

Hey that was some ride yesterday, wasn't it?

I took a quick look at the market stats and my portfolio late in the morning. It brought a smile to my face. Green was the dominant color. Nearly everything I owned was sharply up. Oh happy day.

When I checked again late in the afternoon after the day's close... Awful. All that green had somehow turned to red. More bad news in the mortgage lending market had once again spilled out into the markets in general. All those nice gains, paper gains though they were, had vanished and then some.

The magnitude of the price swing taking place in such a little time period got me to thinking. I started wondering how yesterday stacked up against historical swings in prices.

Well here we are, another Monday. Are you wondering where the markets will take you today? Nasty weeks like the one we just had make it hard for even the most tried and true long term investor.

Last week's sell off hurt. By my calculations on one of my favorite benchmarks, SPY, the S&P 500 Depository Receipt Exchange Traded Fund commonly known as Spiders, was down 5.6% last week. That's a lot of gain to give up in a week's time. Someone with a $100,000 portfolio might have seen $5000 vanish without a trace. Five grand would have bought a really nice vacation. Putting it in those terms makes one wonder whether it might be smarter to just take the money and go on vacation. After all, a vacation would certainly be more enjoyable than last week's flogging.

Well that felt (just about anything but) good, didn't it? A 311 point haircut. No question, a lot of people, myself included, are seeing a lot more red this morning than they're used to lately.

The bears are lapping it up. If you happened to be in one of the two major Exchange Traded Funds set up to cater specifically for the market bears yesterday, you did just fine. Both the Prudent Bear, BEARX, and the Grizzly Short, GRZZX, were up over 2% yesterday.

If you've been bearish recently, yesterday was a big payoff day for you. In fact, you've been feeling pretty good about your investment choices for a little while now. Looking at the chart below tells me your returns have been ahead of the S&P 500 returns for a few days now. In fact, if I had invested all my money in the Grizzly Short fund a month ago, I'd be ahead of where I am today by well about 10%.

Feeling a little apprehensive lately? I know I am.

So many new market highs. Great returns year to date. It's hard not to think maybe we've had it too good for a while, and that maybe, just maybe, we're headed somewhere other than up for a while.

Days when the market drops 200 points always get me to thinking about where my money is in terms of overall risk and return. I like the thought of having a large percentage of my portfolio invested in high return investments at a time when the market is climbing. When it's falling, however, I'd really like to think my investments are relatively low in risk.

But as you probably know, low risk and high returns don't necessarily go hand in hand in the investment world.

It's been three weeks since MSN Money's Jon Markman posted his latest StockScouter portfolio. I have not looked at it since, so I thought today would be a good time to check in and see how our hypothetical 10 stock portfolio is doing.

To recap, every six months Jon Markman, in his Supermodels column on MSN Money, screens the universe of stocks using his StockScouter stock trading system. He publishes a list of just ten stocks chosen by the StockScouter system for market beating returns in the coming 6 months. StockScouter's ten stock choices have consistently outperformed the S&P 500 for the six years. I've decided to track his system's latest stock picks to see how they do over the investment period.

Well there you have it. The Dow closed yesterday above the 14,000 mark for the first time. Another record. Should we be worried? Should we start to lighten our positions in stocks? Maybe take a little money off the table while the pickings are good? After all, you know the old song: Pigs get fat and hogs get slaughtered.

And look how quickly we got here. We only managed to hit the 12,000 mark on October 20, 2006. From that point the Dow took just over 6 months, 126 trading days to be exact, to reach 13,000. And now, only 60 trading days later here we are at 14,000. Shouldn't we be worried about it? Are we getting ahead of ourselves?

Inflation numbers are due out today. I'll be interested to see what the press and the experts they consult with have to say about inflation. Think they'll point a finger at the Fed, and try to make it Ben's problem after all?

While we're awaiting the latest consumer price index numbers, here's an interesting topic to ponder: What sort of retirement nest egg might you need to:

• Generate enough retirement income to live at your current standard of living
• Continue to generate income at the same level, net of inflation, for as long as you live

You might not know it, but there is such an investment. One with virtually no volatility and with built-in inflation protection. This investment is at the far end of the risk scale, where risk is virtually eliminated. And as you might guess, just like anything else in this world, you pay for that privilege.

What's your philosophy on the topic of portfolio rebalancing? Mine used to be one of mechanistic precision. Lately, rebalancing my portfolio is something I do less and less of. And I think as we become more successful, and by that I mean wealthier, we will all gravitate toward less frequent portfolio rebalancing.

The argument for rebalancing your portfolio on a periodic basis - quarterly is usually the recommended interval - remains sound. From time to time it makes sense to sell a few shares of your investments which have outperformed the others in your portfolio and use the proceeds to buy more shares of those investments which have lagged in your portfolio. That is, provided you're still convinced the laggards still warrant your investment.

Portfolio rebalancing is sort of a dollar cost averaging philosophy applied after the fact of investing. The effect is much the same as dollar cost averaging. You're buying less of - selling, actually - securities which are higher in proportion to your overall portfolio, and buying more of those which are lower in proportion to your overall portfolio.

I just got back from a trip to London. I was only there for a few days, but in that time I spent more than I have spent in any two equal length business trips within the US. My fairly ordinary hotel room cost nearly $350 per night. At that price do you think they would throw in Internet access? Not a chance. Add another $30. Coffee at Starbucks, $6. Nothing special, just a venti coffee.

That's what a weak dollar does for (to) you in the global economy.

When a currency is weaker, it means that it will buy less of what it could previously buy. Another way of saying this is it takes more (dollars, in this case) to buy the same things it could before, whether it be hotel rooms or coffee at Starbucks.

My trip to London was made worse by the fact the British Pound is trading strong in world markets. It takes fewer Pounds to buy a Dollar today than it did a couple of months ago. Unfortunately the strong Pound doesn't necessarily translate into cheaper British goods. Not for travelers at least. London is notoriously expensive to begin with; but now that they're ramping up for the Olympics in 5 years' time, an already tight real estate market is pushing prices even higher.