CNBC can be amusing at times, if you enjoy car chases, large explosions, and Three Stooges-style slapstick comedy. All this week, the tide has gone out on high tech stocks, draining capital from the high flyers and pumping it back into traditional blue chip stocks. The Nasdaq has gone down, and the Dow has gone up. Wheeee. The really amusing part is watching paid professionals try to treat this as if it were actual news, worthy of continuous, minute-by-minute coverage.

The lightning flash that spooked the herd this time was apparently President Clinton's announcement that the information collected by the Human Genome Project would be placed in the public domain for the good of all mankind, rather than patented for the profit of individual companies. Logically, this shouldn't be news to anyone, since patenting any part of the human genome makes about as much sense as Columbus patenting the New World or explorers patenting animals they discover on safari. But the patent office is diseased, patenting almost anything anyone submits these days, such as this "Method of Exercising a Cat" (i.e., getting it to chase a spot of light on the floor from a flashlight).

Another recent example comes from Sun Microsystems (Nasdaq: SUNW), which is currently suing Kingston Technologies for infringing on its patent on packaging multiple memory chips together into modules, which is obviously an idea nobody else would have thought of if Sun hadn't invented it. (For the benefit of Sun's lawyers: That was sarcasm.) Jack Bryar wrote a good column on this topic, with lots of links to other sources of information.

So Clinton dragged out a dictionary and showed everyone the difference between an invention and a discovery. He said you can't patent genes that have been around for millions of years in human beings, but he went out of his way to affirm that you can still patent NEW genes you invent, and drugs designed based on knowledge of the human genome. Obviously, this isn't really NEWS, is it? (That was Jeff Fischer's conclusion, as well.)

Daytraders seized on this information anyway to bid down biotech stocks, which obviously weren't trying to develop anything NEW, they were just going to patent all the genes in everyone's bodies and charge people royalties for breathing. (Again, this is sarcasm.) But with daytrading, being right isn't nearly as important as being first.

The REALLY fun part is that this sell-off then spread to the rest of the high-tech industry. On Tuesday, every stock in our portfolio except American Express (NYSE: AXP) closed down, and yesterday our high-tech high-fliers Nokia (NYSE: NOK), Yahoo! (Nasdaq: YHOO), and JDS Uniphase (Nasdaq: JDSU) again closed down heavily, even though our drug companies Schering-Plough (NYSE: SGP) and Pfizer (NYSE: PFE) rebounded more than they'd fallen the day before! Is this supposed to make ANY sense?

No, of course not. What happened has nothing to do with the actual performance of the companies these stocks represent. Rather, it's a prime example of short-term market psychology. Biotech start-ups are high-risk investments, and the owners of biotech stocks are likely to own other high-risk stocks like Yahoo! What they do to one part of their portfolio, they're likely to do to other parts as well.

In addition, investors (and I use that term very loosely here) with a fondness for risk are also likely to increase their risk even more with margin loans. When you buy on margin, you borrow money (using your stock as collateral) to buy more stock, and when it goes up it goes up a LOT. But when it goes down, your collateral shrinks, and if it shrinks too much, the bank makes a "margin call" and forces you to pay back your loan immediately. In a bad market panic, by the time you manage to sell your stock, it may not be trading for enough money to pay off the loan you took out against it. Margin is NOT an investor's friend. At best, it's a useful but dangerous tool, like fire, that should never be left unsupervised.

So, daytraders with margin loans suddenly find biotechs plummeting, and sell off EVERYTHING (including their high-techs) to pay off the loans. Those with cash left look for a safe place to park it, and lo-and-behold they remember these "blue chip" things they heard about in a bar once, and pour their money into those. Follow the logic here -- the price of tech stocks goes way down, and in response traders sell their tech stocks because now they can get less cash for their shares. The price of blue chips goes up, so traders buy blue chips because now they can get fewer shares for their cash.

I mentioned the Three Stooges earlier, didn't I?

In the long term, all of this is completely meaningless. The vast majority of shares in these companies DON'T change hands in any given week, so the company losing 10% of its market capitalization simply means that the small fraction of the company's shares being bought and sold right now are fetching a different price. It doesn't mean the company you own a chunk of is any different. It only has any meaning at all if you're going to buy or sell shares right now.

An analogy I like to use is waves crashing on a beach. If you need to go down and fill up a bucket of water RIGHT NOW, it matters where the water line is right now. It may be high tide or low tide, and the water line moves with every wave that crashes in and rolls back. But that doesn't mean the amount of water in the ocean changes 10% in a day. Here in the Rule Maker Portfolio, we're looking at long-term trends like rainfall, evaporation, and melting polar ice caps that actually do change the sea level. Those we can predict, or at least say something meaningful about. Storms like the one going through the market now are the domain of meteorologists, and predictions about the weather, or the market, more than a day or two in advance are about as useful.

- Oak