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June 22, 2005

Concentration

The game of trading requires concentration. One must focus on one’s own trading rules and not let noise get in the way of what research and instinct tell you. Case in point is today’s action in Research in Motion (RIMM). Although the deal with Sprint to offer Blackberry® service on it’s network is certainly not a “non-event” (pardon the double negative), it hardly justifies the 7% increase in RIMM’s market capitalization posted by mid-afternoon, especially since the news was already anticipated.

No, the action in RIMM today is related to another kind of concentration. It is the concentration of action by traders into a limited number of big names. I observed the same type of action going into the market top in 2000. We see days where the market is flat or down while one big name is soaring. That seems to be a sign of limited power on the part of long speculators. They cannot move the whole market, so they concentrate their energy (monies) into whatever name is making news that day. Another recent example was Google, which on June 20 tacked on about 3% while the Nasdaq Composite lost ground. Although such action is not an entirely unusual phenomenon, it seems to happen more frequently when money is tighter.

Whatever the reasons, such action in stocks like GOOG and RIMM is disparaging to those of us who are short. These strong up days can draw momentum players who may continue to support the stock price in the short term. The good news (for bears) is that such concentration indicates that the well of speculative funds may be drying up. Aside from the Fed opening up the floodgates of distortion, I don’t think the bulls can hold the summer.

Speaking of the Fed, I’d like to pass along a brilliantly worded statement on one of the effects of central bank intervention. It was written by David Jensen in an article comparing Austrian school and Keynesian economics and their effect on policy decisions:

“What economists today call the yield curve which graphs variations in bond yields based upon their maturity, simply reflects anticipation of central bank error and correction of interest rates. This guessing game and speculation over what the central bank will do with interest rates disappears under the gold standard as does the opportunity for outsize trading profit, which depends upon changing sentiments as to where interest rates are headed. This would free up some of the greatest talents in our society to pursue truly productive activity - minds which today are locked-into the financial markets trying to find opportunities to make profit by clever trading of financial assets.”

One final note in closing. It was interesting to observe the homeys fall today in the face of a 10 basis point decline in the 10-year Treasury yield. It could be a sign of impending weakness… or it could just be a one day distortion.

Disclosure: Short RIMM

 

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