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"Market Divergence (again)"

A little while ago, I commented on how the Dow was falling off a cliff and the NASDAQ kept going up. The theory in all the rags was how money was rotating from the weak Dow into the strong Naz. What difference a few weeks make!

Now we're faced with the opposite situation. Now it's the NASDAQ shareholders tripping over each other trying to get out, while the Dow is rallying hard. Today the Naz was down 350 and the Dow was up 300. And the Dow would've been up more if it didn't include Microsoft, which failed to reach a settlement with the DoJ.

The last week or two have simply been staggering. Today stocks fell 40, 50, 60 points on the NASDAQ. There was absolutely no buying interest all day. I was in fact pissed off because I found some good short plays over the weekend, but today I had a paper due and a midterm to take, so I pretty much ignored the market until I got home for the last hour of trading. When I got home I saw the stocks I had picked down 15, 29, 42 points. I missed out on excellent shorting opportunities. (that is, making money when stocks go down) Stupid school.

I should be grateful I suppose. Last year at this exact time I had just started trading and I bought into the high flying tech stocks. The same extreme selloff occurred and I was immediately a bagholding newbie. I didn't know why stocks had sold off so much. I was mystified. So for the next year I learned and studied and knew that this would happen again at about the same time of the year. I'm all cash except for AMD right now. (as a severe undervaluation play and later as a tech winner play) These extreme selloffs are nothing to be worried about.

This is when the money leaves the NASDAQ for the summer. People have been heavily margined in the Naz and when the stocks start to fall, they have little in the way of support or bases to stop at. The margin selling continues and continues as people can't afford to keep their stocks and it just snowballs until the excess is worked out. Then over the summer, the strong stocks consolidate and after a final capitulatory selloff in the fall, the good stocks resume upward trends. Right now the weak stocks are being weeded out and you'll never hear from them again. At least, this is the theory.

I cannot imagine the people who are getting hit with margin calls, or calls from brokers telling people they need to give some equity back to the broker to cover the borrowed money he used. It must be ugly out there. I know how it feels because it happened to me last year. Luckily I didn't have much money then so I didn't lose much. This year I'm counting my blessings and am happy to have survived thus far. Trading is about surviving.

Stocks fall faster than they go up. Unfortunately, most people don't realize this. It only takes accounting errors or lost clients to do the trick. Heck, it can even only require market weakness. We have a little of both right here. Good stocks are getting pulled down, although some strong tech stocks remain -- Cisco and Intel among others. The newer stocks are getting smacked. As Cramer at thestreet.com emphasizes, it has to do with all the supply being unleashed onto the market. Greedy companies releasing more shares to finance more operations, insiders releasing their shares to lock in profits, more IPOs, more IPOs, more IPOs. It's supply. And it keeps coming. There's not enough demand for it, particularly at this time of year when people pack up for the summer and go play on their yachts. Up until now the liquidity has kept the Naz afloat, but now, there's nothing to hold up all these shares. It'll take some work over the summer to digest it all.

I'm amazed at how regular this all is. Until there are differing patterns and signs, I can't see how the NASDAQ run won't continue on for another year at least. It still manages to destroy the crap companies and destroy the greedy. All this pain is good and healthy. What had me wondering was why money was leaving the Dow just a little while ago. A lot of NYSE stocks were sucking it up as it was. Perhaps it was a shake to take out the weak hands before bouncing so strongly as it has been. Maybe it will tear up the charts to new highs over the summer? Who knows? The dichotomy has been fascinating.

I'm still bullish and will have better capital at the end of the year to buy my favorite stocks which should be at cheap prices and good support. All this NASDAQ action just goes to prove that it's dangerous to invest in these stocks -- the way to invest in the NASDAQ is through mutual funds to spread out the risk -- but playing single stocks can definitely land you in hot water as stocks like Legato, MicroStrategy, Celera, and so on have illustrated.

I've really grown to love all this. There are just so many ways to approach it. You don't have to have a theory for everything and you don't even need to be right all the time. But you take what you can get and you always maintain discipline. It's a test of your own abilities and only those who are willing to keep learning will survive. There is something wonderful about seeing which companies make it and which don't, and seeing the difference in perception between the tech geeks and the Wall Street investors. What the tech geeks see is what Wall Street only sees weeks to months later.

There is a simplicity to it all, an uncluttered stock market that has its own idiosyncrasies to it, its own little mini-patterns inside larger patterns. All the crap that people feed into it in order to try and manipulate it doesn't pay off in the long run. It has its own ideas about where it wants to go and what it wants to do, WHEN it wants to do it. It feeds off the weak and embraces the strong. It simply makes a great deal of sense to me, at its most basic levels. All the noise you hear on CNBC or in the papers or from fund managers is just that; noise. The market is always willing to tell you something if you only listen to it, not any stupid talking head.

I'm happy with what I've managed to accomplish here. I learned my lesson that I was supposed to learn from the very beginning, which is sometimes the hardest time to learn lessons because you don't really know what is important yet. But like all traders admit, they are always worried the market will come to snatch away their rewards if they are full of too much hubris. It's a psychological battle. Discipline, discipline, discipline. But I think it becomes much less of a battle if you achieve a sort of harmony with the rhythm of the market. It becomes more like a symbiotic relationship.

Summer will be easier to trade now that I know what a trading range is. My god, last summer drove me nuts. Stocks would go up for a bit, then right back down to where they were before... They never went in one direction for a sustainable period! I'm think that's what we'll see again this summer, on the Naz at least.

And as for AMD. AMD, AMD, my favorite stock. Not only is it the number one flash memory supplier with Hitachi, it also has flash memory deals with companies like Cisco and Alcatel. It has a communications division which is beginning to do well in its own right. But the real deal is with the processor unit of AMD, the unit that produces Athlon processors to compete against Intel's Pentium. AMD's Athlon is cheaper than Pentium 3, which makes up for its slightly slower performance. But later this year, with the production of chips from a brand new fabrication plant in Dresden, Germany, AMD will be releasing the Thunderbird, which will remove all the technological inferiorities in the AMD chip and will most likely crush the Intel CPUs. AMD also has the Spitfire, which will compete against the Intel Celeron, on the low end of the processor market. Intel has been crushing AMD with its Celeron chips in the past, but rumor has it that the Spitfire will be faster than any equal MHz processor out now. AMD now has deals with every OEM (those companies that put computers together to sell them, like Gateway and Compaq) except for Dell, which has some allegiance to Intel. Rumor also has it that Dell is close to ordering AMD chips, which would be the biggest breakthrough for the credibility of AMD yet. Given strong earnings expected through AMD's gaining marketshare, I see the share price going up substantially as people begin to believe as I do. Today AMD closed at all-time highs, when the Naz was down 350. Now that's strength! My predictions for the future remain as such: Dell will begin using AMD chips. AMD will gain far more than 30% marketshare from Intel. Intel will falter in its earnings this year and it will no longer have the investor confidence it once did. AMD will become a favorite of other companies in the industry, since it doesn't bullshit around like Intel does. At least, not yet.

So what's to say? The people who thought the NASDAQ was the place to be are getting beaten right now, while the people who bought the Dow at its lows are smiling happily. The old economy value stocks are doing great. My S&P fund is rocking. Heck, even retailers are breaking out to new highs. It's beautiful. Greed and fear at their extremes.

Now let's see what happens the rest of the week. Microsoft has been found officially to have engaged in antitrust practices, and this combined with more margin selling tomorrow should weigh the market down. Sadly enough it doesn't feel quite like a bottom yet, although we're very close. We definitely need a market bounce going into earnings season. After that the market should churn for a bit and the chaff will be thrown away.

Either way, I have my long and short candidates ready. Just watch out...the upwards bounce will be strong! And fun! But first we have to hear the cries of pain and suffering all too common at short- or long- term bottoms.

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