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"Anatomy of a Vicious Correction"

I'm still new to the market, and last year I didn't really have a sense for telling when the market was going to change. When January through March came around, about the only thing making me consistent money was AMD. A lot of the other stocks I was buying were failing to sustain rallies. Some were breaking trendlines. Didn't know it was because money was beginning to drain out of the market. Didn't understand that shares were being added to all sorts of stocks' floats, thus drowning them in supply.

That's one of the big lessons I've learned so far. If you keep an eye on lots of charts, you begin to see that a long trend is ending.

Of course, that all sounds very good in hindsight, doesn't it? But I think when next year around summer comes, I'll be able to recognize when it occurs. I mean, after all, I CAN take credit for calling Naz 5000-5200 and then the market starting to go south in April-May. It's in the old news section. Anyway, the point is that it's all a matter of experience. The more different markets you see, the better.

The Dow and Naz started disconnecting early this year, and much was written in the press regarding that. Lately, the Dow started turning around and rallying, while the Naz started dipping. Oh, well finally they're getting synchronized, the people said. The best explanation I've read about all this is that this is a delayed Y2K effect. Yes, the dreaded Y2K effect. The liquidity that the Fed pumped into the system to offset any slowdowns at the pseudo turn of the century was being taken out after the New Year. This affected the Dow first, and then the Naz. Now we're cutting major fat off the market, killing margin players and poorly invested individuals.

The Naz topped out on Friday and Monday after a relief bounce. It was a 50% retracement from the highs. At this point, I think most tech investors were stunned by the decline and didn't think much of it. The bounce made things okay again, for the most part, in the public's perception. "Whew, that was a close one!"

On Monday things started to go sour later on in the day. Stocks were completing their bounces, people were trying to buy things up higher. But the sellers eventually won and...

We sold off the next day...

And the next day too...

And Thursday...

And wow, Friday, to wrap up the week.

Going back a bit, I was shorting a bit prematurely on Friday. 50% retrace sounded nice but I was fighting the tides Friday. Nothing really went anywhere at the end of the day. Cramer and his cohorts called for a rally, and it was noticeably weak. Shorts and sellers came in the next week and clobbered everything.

On Wednesday, I picked up some AMD at the close, almost at low of day, and sold it the next morning for a nice gain. Seems AMD beat earnings estimates by almost twice the numbers. Blowout earnings, best quarter ever, huge growth predicted for rest of year, etc. etc. But selling continued in the market and AMD went down too.

The thing about Wednesday was that I had to go to French class during the AMD conference call. So I sat in class thinking about how my baby AMD was doing. When I got back, I caught the news and then the DSL went out. For the rest of the night and most of Thursday. That really pissed me off. I was really happy about AMD and wanted to read the various AMD and hardware sites, and hit the bulletin boards. Blah. Turns out SWBell's DHCP server went down, which meant that all the DSL users were trying to connect to a small pool of IPs, and there weren't enough. I had to get up, go to the computer lab, and sell the damn shares from there. My roomie had someone he needed to talk to online about his homework, and he couldn't do that. Not good timing for either of us.

So Friday was one of the most amazing days I've seen. And I've seen a lot of them this year. The Naz has been one volatile mother fucker. Anyway. At the end of the day, there was HUGE selling in the Naz. The Dow was basically crashing. The TRIN, a measure of bearishness vs. bullishness, and usually ranges from 0 to 2, I think, was at 4.5! Blood red selling. HUGE selling pressure. Some folks think that some hedge fund or two was being liquidated at the time. I guess we'll find out next week.

I've never seen all the indicators that bad before. It was just puking all over the place. The Dow and Naz were revolting. No one dared buy anything. Nothing was bouncing. I had a short to cover at the end of the day. To be honest, most of the stocks I was watching didn't fall much. I've been going to all cash at the end of each day this week. I missed out on tons of short money, but it's just way too risky to hold stuff overnight when the market is this volatile.

Now it is the weekend. The press is of course freaking out. News articles tell of people who need to pay taxes on Monday and can't sell their stock because it's down. There are traders who got completely cleaned out last week. There are people who were up big earlier this year and are now forced to pay margin calls. It was a bloodbath. Imagine people receiving margin calls AND having to pay their taxes. It's a disaster. Some say that a lot of the selling was profit-taking for taxes. Well, who knows. Anyway, a lot of margin was the reason the Naz was so high. Now the people who put up second mortgages and similar daft things are getting their asses handed to them.

The press is predicting a Monday crash. Everyone is predicting a Monday crash. It's Sunday now and Hong Kong, Korea, Japan, and Australia got hammered. Some circuit breakers went off. I think, though, that Taiwan was actually up this evening. Anyway, all these markets follow the US market, usually. Of course, US investors will read this tomorrow morning and freak out even more.

Sell sell sell comes the media cry! Sell sell sell comes the cry of the red-breasted wussy investor. They of course want to sell NOW, because that's when the gut-wrenching pain hits hardest. It didn't hurt at all at the beginning of the year, when everything was fine and the Naz would never stop. BLACK MONDAY! RECESSION! DEPRESSION! IT'S ALL OVER!

I am allowing for the chance that maybe all this margin selling will collapse the market. There is always that opportunity for things to just happen at the complete wrong time and for the markets to crash, thus ruining tons of paper millionaries and cannibalizing stock purchases, company deals, profits. I'm gonna be careful this week. BUT.

BUT. I think all this is a bunch of bear scare tactics. It's a load of shit. PANIC and capitulation happen at the bottom. Everyone begins to doubt the strength of the US economy. They begin to doubt techs. They think the Internet is once again a fad. Nothing has any value any more. The world is falling apart. Really it's only their portfolios that are falling apart.

So as contrarians like to say when the papers are filled with doom and gloom, it's just about time to buy. This requires some patience and discipline, of course, to avoid the big crunch when the markets periodically collapse. But all this seems to me to be summer selling, as I've said all along. The high flyers come back down to earth to put in some consolidation. The crap companies that dumped insider shares and put more shares on the market to raise money get fucked. Their investors can't support all those shares coming onto the market. All the greed that we saw in the fall and winter is now coming back around to bite these shit companies. You won't see any more of a lot of them. And that's just fine to me. Only women burn cash faster than these new companies. Just kidding.

I spent this Saturday basically looking at companies until my eyes were bleeding. A lot of them have excellent growth and financials. They will be key components of the digital revolution that will continue through most of this decade and beyond. They've been hammered lately. They ARE bargains. Other stocks are bargains too, but I know technology so that's all I buy. I wouldn't buy stuff I only heard about. I do know about retail, being a consumerist American brat, but I of course want the growth.

CNBC has been trotting out the bears like Tice and Fleckenstein, from what I gather. They bring in the same crap arguments they've been using for years. The same bear shit that caught me in the fall. Oh, look how this correlates to 1929. Look how the Nikkei fell. Doesn't it resemble the Nasdaq? Greenspan's bearish! He hates us! Etc. etc.

All nonsense. As one guy on IRC put it (and I paraphrase), the dancing bears come out when the blood starts hitting the streets.

People said Abby Joseph Cohen, tech bull, was bearish. That was of course not the case. She said she took some money off the table before a lot of the damage was done. She came on Friday, I believe, and said that stocks were now looking attractive again and that there was room for significant price appreciation from here. I believe she also reaffirmed her S&P 1550 target for end of year. How is that bearish? Bears will stoop to ANY low to scare people. (although the same can be said about bulls, but the bulls have been right for quite a while now)

So I am ready to BUY. It's the ultimate time for a trader, when we have this much volatility. Traders wait all year for moments like these, when everyone else just gives up completely and things start falling like rocks. Who do you think is nimble enough to buy at the bottoms? Really? Volatility equals money. Of course, you can get burned hard, but that's kind of where your education and skill come in. And a little luck.

Monday is tax day. I think for a market bottom to coincide with this would make a lot of sense. Now, perhaps it'd make more sense to bottom on Tuesday. Well, we'll see. It could of course just keep falling and be the Black Monday everyone seems to want, in their sick, perverse ways. Money should come back later this week as people are done with taxes and as earnings season is coming up. EARNINGS ARE STILL GREAT. Not many tech companies pre-announced warnings. What's been tripping up tech companies lately is bullshit accounting. That's their own fault.

I am looking for fast movers. I like Redback (RBAK), JDS Uniphase (JDSU), and Bea Systems (BEAS), all of which have outstanding growth and clients. They are the leaders in their sectors and have little serious competition. They're wonderful growth companies. And they got hit HARD. Should be good for big bounces.

I of course still love AMD. There was ONE analyst who had a strong buy rating on this stock when it was under $20. He is a TRUE ANALYST, not the phonies who recommend stocks at the top so that they can sell their positions into the retail buying. He said that people will HAVE to own it at around $150, and it's at that point that AMD might be a sell. I tend to agree.

My research over the weekend showed that one of Micron's investor conferences revealed that demand for computer components is surging, even in a seasonally bad second quarter. I don't like Micron much, but their news seems great for AMD. AMD's earnings are explosive, and they sold tons of Athlons last quarter. This quarter AMD has AMD Saxony's Fab 30 in Dresden producing AMD's next generation of CPUs. These will sell like hotcakes because of their performance that is sure to best Intel's, and because their prices will be quite good. AMD's profit margins and ASPs will continue to rise. The great second quarter for computer components will increase demand for AMD. AMD's flash memory will contribute as well. But one of the most revealing things about what's going on is the news that Intel is having Coppermine shortages that will last until July. What does this mean? Well, it means that Intel's chips will mainly only go to Dell, because Dell and Intel are in kahoots and they rely on each other so much. But what about other boxmakers and companies? They will have to use AMD in order to conduct their business. They will find the chips to be faster and cheaper. This equals an increase in marketshare for AMD which of course affects long-term profits for AMD.

This all cascades. Intel will continue to have problems rolling out its motherboard chipsets and CPUs. The negative press and lack of stock performance will begin to have its effect. AMD will receive all the good press, Intel the bad press. Intel has enough to contend with from Rambus's failures and Intel's infatuation with spending money to buy communications companies. What's up with that, anyway?

AMD is going to hit $150-200, mark my words. My friend, who actually bought a tiny bit of AMD under $20, is doing the math on earnings and comes up with even more astronomical figures. We both see AMD pulling over $5/share in earnings this year. More like $7-8/share. Figure out the numbers and see what that will value AMD at by the end of the year. Beautiful, isn't it? Now, as long as there aren't any Taiwanese earthquakes, or fabrication plant failures, or any other surprises...

Things are still great. I have my Janus application form here that I've been saving for months. I'm looking at opening a growth fund with Janus at these bargain prices. I still need to make my 2000 Roth IRA contribution to the Vanguard 500. I have a lot of buying to do, next week allowing. XRX, IBM, MOT, NT, AMAT, AOL, ADBE, JDSU, IBAS, ITXC, IIJI, all nice picks. I can't help but love semiconductors. I'm sorry.

The summers of '97, '98, and '99 all showed themselves to have scared out the weak and put the control back in the hands of the strong. The weak spent the rest of the year buying at high premiums.

So that's what happened last week. Nasdaq is near its trendline and moving averages from anywhere from 2800 to 3150, depending on where you want to figure it. Everyone has their own ideas where. Personally I'm looking for 3000 even. Monday will probably be more of the same, to intimidate the last of the longs. Then I'm looking for a big bounce later on Monday, or on Tuesday. And I intend to capitalize on it. Blood is in the air.

As for this weekend, I enjoyed it very much with a dish of pasta carabba, signo di cioccolato, two strawberry daquiris, some basketball, lots of company research, some big sandwiches, lots of comfortable sleep, thoughts of graduation in about a month, and a new high in the portfolio.

Save for finishing filing my taxes, which was a major BITCH because my money is put in a lot of places these days and I'm basically a hybrid worker and student, it was a pretty swell couple of days. At least TurboTax helped out. But I think I'm getting a CPA next year... :)

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