Volatility continues

Following Thursday's big drop in the market, Dow closed down 30 points today. This index does not reflect the true market condition, however, due to Fed's injection of billions of dollars into the market.





The Dow Jones industrials, down more than 200 points during the session, ended with just a 31-point deficit and managed to post a gain for the week.





The stock market, which has been gyrating for weeks over fears that credit is drying up, pared its losses after the Fed's injections of cash and following morning comments from the central bank that it would do all it can to "facilitate the orderly functioning of financial markets." The steep declines seen at times during the session and persistent volatility, however, showed the depths of fear that had some investors yanking money out of stocks.





The New York Fed, which carries out the central bank's market operation, announced a three-day repurchase agreement of mortgage backed securities and then two more of the so-called "repo" moves to inject liquidity into the market. The Fed's maneuvers came after the fed funds rate, the amount banks charge each other for overnight loans, ticked above 6 percent again Friday -- well above the Fed's target of 5.25 percent and a sign that credit was becoming harder to obtain.



The Fed stepped in after the same occurrence Thursday, injecting $24 billion in temporary reserves to the U.S. banking system. In a repo, the Fed arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks.





At this rate, Fed will need to cut rates in order to boost the market despite the inflation issue. Note the similarity when Fed rate cuts that calmed the market after the 1998 Russian debt crisis and the implosion of the hedge fund Long-Term Capital Management. I expect a rate cut soon.





More on the Fed move. It is interesting for them to have done so in this juncture in time. Investor confidence worldwide has been shaken by the credit market problems. In Asia, stocks fell Friday after regulators including the Bank of Japan added liquidity. The European Central Bank for the second day added cash to its money markets.



These banks and others around the world haven't worked together to inject liquidity into the markets since the aftermath of the Sept. 11, 2001, attacks. But the measures, intended to keep financial markets well-oiled, also seemed to confirm investor fears of a larger problem in the credit markets that will stall corporate growth -- including the burst of takeover activity that powered stocks higher this year.





Overseas, Japan's Nikkei stock average fell 2.4 percent. Hong Kong's Hang Seng Index fell 2.9 percent. Britain's FTSE 100 fell 3.71 percent, Germany's DAX index finished down 1.48 percent, and France's CAC-40 fell 3.13 percent.





So how do investors profit in this market? Well, despite the market turmoil, have you noticed that large cap tech stocks are holding their ground? Although the recent drop in the market reminds us of the dot com bubble in early 2000's, this credit nightmare have not affected large cap tech stocks too much. Boosted by their good earnings, here's some reasons why you should look into tech stocks.





And exchange traded funds that group tech company stocks are shining.
One of the brightest performers for the past several weeks has been Merrill Lynch's Internet Architecture HOLDRs Trust IAH. It's up 24% for the year. Some of the top holdings includes the following.



Big Blue
The heaviest of all is IBM, the fund's top-weighted holding. Its stock climbed 4% last month after the company announced a second-quarter profit of $1.50 a share on better-than-expected earnings.
On Thursday, Big Blue launched a new ePedigree system to strike back at drug counterfeiters. The black market in counterfeit drugs is estimated to reach $75 billion by 2010.
The system will also help companies follow new track-and-trace regulations, which will be in effect in some states by 2009. Tagging each bottle or package with serial numbers will allow the system to track each stop on the supply chain, from manufacturer to distributor to point 15f sale at a pharmacy or hospital.
Recent mainframe simplifications and increased use of Linux have also helped boost IBM's stock performance, analysts say.

Another top holding, Juniper Networks JNPR continued to hit new highs this week. The uptrend follows a 12% surge last month after the network equipment maker raised its sales forecast to more than $2.7 billion from $2.6 billion.
The company recently announced an $86.2 million profit for the second quarter of 2007. Over the same period last year, Juniper lost $1.21 billion. The turnaround came as Juniper released new products and pushed service sales during the quarter.

Cisco Systems
Technology touchstone Cisco Systems CSCO another of the fund's top holdings, saw its stock climb more than 7% this week on huge volume. At 31.84, the stock is the highest it's been since 2004.
The swell came after officials announced Tuesday that the company's earnings per share leaped 32% to $1.17 in fiscal '07 from 89 cents in fiscal '06.
Companies' increased need for network upgrades helped fuel Cisco's earnings jump, said Chairman John Chambers. Investors were especially pleased that the company also raised its long-term revenue forecast.

Oddly enough, tech stocks look great in this market downturn that looks remarkably similar to the dot com bubble.