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August 22, 2007: The last market update on August 6th discussed the increasing volatility in the market. At that time the RiskGrade (a measurement of volatility) of the S&P 500 was 81, up 69% from June. Currently the RiskGrade of the S&P 500 is 98. We are interested not only in the number but in the speed in which the RiskGrade is increasing or decreasing. When volatility is escalating, especially so quickly, the market generally goes down; that has been the case this time.

We now have our 10% correction in the S&P 500. I am very happy with how our portfolios handled the correction. We bought the NASDAQ 100 inverse fund at the beginning of the decline and earned a 15.23% return in that fund in less than three weeks. We use the inverse fund to protect against declines and to reduce a portfolio's volatility.

Thursday's early sharp decline followed by a rally on high volume is usually an indication of a short term bottom in the market. I sold the inverse NASDAQ 100 fund the next day, on the opening, and bought the long NASDAQ 100 fund the same day. That move increased the average portfolio's RiskGrade by about 20 points. The goal is to have a higher RiskGrade when the market is going up, and to have a lower RiskGrade when the market is going down. The most important function is to protect against the decline, which was accomplished in the past two weeks. Probabilities are that we now should have a trading opportunity to benefit from a rebound in the market as a whole, which is occurring. We still have a substantial cash position in the event the current advance fails.

August 6, 2007: The RiskGrade (a measurement of volatility) on the S&P 500 is at its highest level in over four years (now at 81, up from 48 in June) and is trending higher. Low market volatility is always followed by higher than normal volatility. We also have not had a 10% correction in over four years (the longest period in the history of the S&P 500). Higher volatility almost always means the market is moving lower. The S&P 500 has declined 7.7% from its highs and is only up 1% year-to-date through Friday.

My short-term indicators turned bearish on 7/25 the same day I bought the NASDAQ 100 Inverse Exchange Traded Fund. The Inverse ETF moves twice as much, in the opposite direction, as the NASDAQ. I sold two stock positions prior to 7/25 based on individual technical sell signals and increased volatility. I sold MET on the 26th. The proceeds from the sales were put in the Money Market. The positions we currently hold are out-performing the market. The NASDAQ inverse fund is up 9% in a little over a week. This is a period where we can show the significant benefits of volatility-managed portfolios. The Inverse ETF is like your home thermostat turning on cold air when the temperature is high. The result keeps us in the comfort range. You may want to review the "Portfolio Thermostat" portion in my Investor Revolution book.

The market is currently oversold and is subject to a short term upward bounce. That said, it is looking like we may finally get the 10% plus correction we have been expecting. My focus, as always, is on risk management. It is important to remember, market fluctuation means the market goes both up and down. An important part of my strategy is to benefit from the fact that the market fluctuates. I am happy with how the portfolios are doing during the decline. When we are successful at managing the decline, the upward fluctuations come off a larger capital base resulting in larger gains with less risk over the long run.

The above stated numbers and statistics, while deemed accurate, Canterbury Investment Management, LLC, does not guarantee the accuracy or completeness of the content. Past performance is no guarantee of future results. www.canterburygroup.com.