Market volatility today can be broadly categorised in two important ways. First is the medium term volatility, which is concerned with predicting the market trend in the next three to six months period. Understanding this trend and ability to predict this is essential to make investment decisions. However, the trends in the results of chip companies in the US have cast a doubt about robust growth rates for the PC industry and therefore for all the associated industries, including software companies. In reaction to this apprehension several stocks have dived down. On Thursday the Nasdaq Composite Index dived down more than 100 points, but recovered towards the last one hour. This has kindled hopes amongst several Indian traders and the stock market here has closed the week on a cautiously optimistic note.

However, one should not forget to give due weightage to the deep dip of Thursday , nor can one presumme that the worst is over. Acually the robustness of the last one hour could have well been a case of technical pull back, including covering of shorts.

The point is the longer term concerns persist and the investor will turn a blind eye to this only to his peril. Thus the uncertainity about the medium term outlook has induced quite some volatility. But this has been happening for quite some weeks now. The Nasdaq has been dipping repeatedly and analysts have been busy trying to figure out if it has bottommed out. Shrewd traders in the Indian scenario have realised the futility of trying to predict even the medium term outlook or trying to build their investment strategies on this forecast. They have thought it better to device better tactics to make money irrespective of what the medium term outlook is. The result is there for everyone to see. The emergence of the day traders increasingly and the extension of day trading into blocs of 2-3 days trend is the culmination of this realisation of the reality of market dynamics. But even if you decided to play on the day trading basis or on a bloc of 2-3 days the handling of volatility is proving to be quitedifficult. It makes for the difference between you making money or losing money.

Is in this context that one needs to understand volatility in a deeper persepective. Volatility is the result of investor psychology playing up on the field of expectations. Any one who has been watching the market closely will be tempted to point out that the recent downturn in the market seems to point out to the phenomenon of markets being efficient. Yes, to an extent this is true. But the closer truth is that we are in the grey zone between efficient markets and markets driven by sentiments, fears and greed. The efficient market theory is in place if you consider the market's reluctance to play up the momentum stock, as it once used to. New bench marks for evaluation of market price are coming into force. The re-rating of Satyam Computer is an excellent example, or for that matter even Zee Telefilms. But given the fact that the infoteck stocks continue to be the bst promise for making money, traders are flocking to these counters again and again. The desire not to miss out on a profit pportunity, call itgreed if you will, makes the trader discard the new evaluation sticks for the moment and take a bet as it were. But he knows that he is operating on unsure grounds and is therefore quick to cash in his profits. This lead to a yo-yo market.

The FII's exit on the other hand show that they appear to have made up their mind more firmly about the new ways of valuing the infotech stocks. The intent here seems to be booking profits on entries made long ago at much lower prices.

Thus you see two conflicting stands. One of the FIIs, who stick close to the new benchmark for valuing and the other, the local traders willing to bet that perceptions will change and even FIIs will start buying at higher prices. Front running is therefore the right thing to do.

As long as there are conflicting perceptions the market volatility is bound to be high. Investors must realise that there are too many issues in the pot boil. The slowing down of the US economy and what impact it will have on the software industry. The downturn for chips and is that a pre-indication that the slow down has already started permeating to the computer industry. The contrarian view that all is well with the chip industry and even the slow down in the US economy is temporal, soon to be corrected say in the next four months.

As you peer into the future, you have alternate scenarios. There is real difficulty in predicting beyond a point. The down to earth approach is to watch the future scenario and look for clues that recovery has gained strength.

But there is money to be made in between. And therefore traders are willing to keep betting all the time.

You can take only so much volatility into your stride, as your purse and your risk taking ability. If you are conservative the right thing is not to play the volatility game now and wait out for better times. On the other hand if you dislike missing out on trading, then playing it on a daily or short block basis is the right approach. But then you must always be ready to put a stop loss and take your profits on very quick intervals.