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2HRS2GO: Market still a momentum bed

More than a few folks hope the Nasdaq's recent mood swings herald a comeback for traditional investing.

They may be right, but I wouldn't put money on it.

Have an opinion on this?

The Dow Jones Industrial Average and the tech-saturated Nasdaq Composite Index have marched in opposite lock step over the past month, with the former gaining 13.3 percent even as the latter yielded 13.7 percent. Obviously the money is flowing away from the likes of Microsoft (Nasdaq: MSFT) and Sun Microsystems (Nasdaq: SUNW), and back into DuPont (NYSE: DD), Citigroup (NYSE: C), Home Depot (NYSE: HD), even International Paper (NYSE: IP), of all things.

Maybe that means the market is returning to solid companies with reliable numbers, except that it never left them. With the exception of IPO buyers, Wall Street has always valued strong fundamentals. It's just a question of how much value.

Don't believe the New Economy versus the Old Economy argument. Nowadays, this market is all about New Trading versus Old Investing.

You can see it today: despite the Nasdaq's decline this morning, a Way-Overvalued-On-A-Traditional-Basis stock like Cisco Systems (Nasdaq: CSCO) gained ground initially, although it's now in the red as of early afternoon.

That last sentence changed literally between the time I began typing it and the time I finished -- it was up 1/16 with "You" and down a full point by the time I got to "ground", and I'm not a slow typist. Good thing I checked again before finishing the paragraph.

And that illustrates what this market is really about.

Despite all the bluster and complaint about volatility from professionals, I suspect many market players like a frothy, anarchic sea of stocks. Fewer and fewer people are playing the fundamental analysis game, because although it makes logical sense, it's extremely difficult for a non-insider to do.

Individual investors and money managers at the small end of the fund scale can't get the kind of company data available to Berkshire Hathaway. Joe Blow can't get face-to-face interviews with company management the way Warren Buffett can. The New York Times and The Wall Street Journal can't get interviews like he can.

In a fundamental market, the large players will always have an edge, which is why the pros so often quoted in the media are praying for a return to traditional investing.

But in a volatile, momentum-driven environment, institutions have no advantage over individuals because technology now puts real-time market data at your fingertips. Your trades might not be executed as quickly or as efficiently as a hedge fund's, but it comes pretty close these days, despite recent and well-founded criticisms about customer service. That's why more of you are trading online.

I'm not entirely sold on the (pseudo?)science of technical analysis, but there's no denying at least some people make money doing it, and more people are eager to try it. Just check out the stock message boards -- they're filled with would-be trendline experts.

No market can exist solely on technicians, since TA is all about tracking psychological trends. Obviously there's no sentiment to track if everyone relies purely on share price charts. But there are plenty of people who aren't trading on TA, but simply moving with the hot news, the way many of our ZDII Investment Challenge players tend to.

Unless you're one of that extremely small group that has a good feel for these things, event-driven trading is a truly dangerous way to play for a long time -- you're likely to lose not just your shirt, but maybe your boxers as well.

Yet people take the risk, which is fine by me. It's their money.

And a volatile market is not only fine by them, but preferable for traders of all types. Whether the market rises or falls, a good trader makes money. From the trader's point of view, volatility presents opportunity rather than pure risk.

Then it turns into a self-fulfilling cycle: more people jump onto the volatile bandwagon, which makes the swings wilder and wilder, until the weakest players are shaken out. Last week's correction removed many of those over-margined players, and if it didn't, the markets' new push for higher margin requirements just might.

Even if the brouhaha over margin buying dies down, it won't stop people from playing the volatile game. Just last week, the Nasdaq set a new volume record: 2.9 billion shares traded last Tuesday.

So Dow gains don't necessarily indicate any return to fundamental investing, because the growing ranks of individual retail folks will have none of it. After the beating applied to some of these Dow Jones stalwarts earlier this year, the charts simply might have pointed to a blue chip rebound -- for now. 22GO>