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Editor's note: "Manifesto for a New Market" is a week-long series discussing the changed conditions of the stock market in the Year 2000, how stock-picking works now and why. Be sure to check out other installments in the series by clicking on the above tile.

When I was a second-year law student trying to trade my options account while muddling through the curriculum, I was always looking for some spare pocket change to exploit. One way I could bring in some income was to do some writing on the side. Business editors were always looking for some good copy so I tried to do a couple of pieces each semester when I could cram them in.

One idea I came up with was "the anatomy of a one-point gain." I wanted to show all of the details, all of the little bits of data, all of the fundamental reasons why a stock might have moved a point. I figured that I could follow a bunch of stocks and chart how the information involving their companies got factored into their stocks. I had this image of a discounting mechanism that worked perfectly to price in news.

As part of the research I went to one of my favorite brokerage houses, where I knew someone in top management. We had become friendly. I told him about my story idea. He picked up the phone and barked an order to buy 50,000 shares of

National Gift Wrap and Box Company

with a "nine top." (The name of the company has been changed to protect the innocent.)

I said, "Why did you do that?" And he told me to watch National Gift Wrap on his screen for the next 10 minutes. Sure enough, right in front of me, National Gift Wrap, an $8 stock, moved to 9. Right before my eyes.

"There," he said, "there's your anatomy of a one-point gain. I moved it and

nothing

happened at the company."

I quickly called my editor from a payphone and cancelled the assignment. The idea of linking a stock to its business over a short period of time now seems stupid to me. Stocks go up because of demand. Stocks go down because of supply.

From that day on I vowed to be deeply suspicious of the notion of a company's stock correctly correlating with the business of a company. I am grateful for that exercise that day in 1983, because it taught me a valuable lesson for this market: If there is demand, a stock goes up. That allowed me to understand that the market is quite literally a snapshot of the current flow of funds.

When there is an imbalance of "ways to play" a trend, the stocks in that cohort go higher. When no one wants to sell and there are many buyers, the stock goes higher until a seller can be found.

Gauging demand for a stock is much more important over the short term than gauging the demand for a company's products. Money managers have known this fact for years.

But what is driving the old guard nuts and what is making the new guard a ton of money is the magnitude of the short-term moves. Take last Tuesday. It was possible to capture 40- and 50-point moves in a few hours.

For the old guard, those are moves that would not have occurred over quarters -- or even years. For them, such moves seem like time-lapse photography. But the for the new guard these moves make all of the sense in the world. They also make a mockery of the notion of long-term investing. Long-term investing may mean that you will

TheStreet Recommends

miss

the moves, because the moves are all a function of supply and demand.

How did this happen? Why wasn't it always like this?

It wasn't always like this because the computer, the personal computer, combined with the high-speed lines and the Net enabled people to act faster than they have ever been able to act before. Things are now instantaneous. But the business is not an instantaneous business. It was not meant to be conducted at the pace it moves at now. It can't handle this pace.

As an aside, I am often reminded of the fabulous

Goodbye to All That

, a memoir of the great Robert Graves from his time as a soldier in the Great War. Graves writes eloquently about how mechanized warfare exceeded the ken of the generals. Their infantry tactics did not presume the machine gun and heavy artillery.

That's how our business has become. The short-term demand for stocks, courtesy instant ordering, far exceeds the short-term supply of stock for sale. So you get artificial runups as the people operating the machines from the sell-side walk away, and the customer sellers simply aren't ready to sell.

It is not that supply and demand aren't in balance. They always are -- at a price. It is that demand, because of the swift nature of the machines, can overwhelm supply on a whim, allowing for giant moves in stocks almost instantaneously.

So, if you are swift, and a guest comes on

CNBC

and hypes a stock, you can pick the offerings by machine that are too slow to be pulled, and then offer stock much higher to the masses who are less swift but still mechanized. They are in slow-moving trucks and you are in planes doing precision daylight bombing.

Periodically the sellers are in shape and the whole equation changes. Take an incident a few weeks ago when a guest on

CNBC

hyped

Arch Communications

(APGR)

. We had been sitting on a position in the name, petrified because we had felt that pagers were being outmoded by other wireless hardware.

I grabbed the remote the moment I heard the stock mentioned. I waited, just like a machine gunner, who is up against a marauding infantry that fires only single-action Mausers. I saw the charging infantry move the stock up to 12, then 12.25, then 12.50. When the enemy was right on top of me, where I could see his glee and his belief that he would overrun us, I let loose 200,000 shares of Arch with my howitzers, nailing the charge at point-blank range. Seconds later the stock was at 11 and I had finished my volley with a 12 basis. A few hours later and it was back at 9 where the charge began.

But most of the time the sellers are not so ready. They are not sitting there in the nest, ready to take aim and fire. And demand overwhelms supply.

In the old days, the buy orders would come in, the calls would be made to find sellers and the buyers would wait patiently while the sellers were rustled up. The goal was not to "get the stock going." The goal was to get stock in at a reasonable approximation to the last sale. My how quaint that seems now.

These days, with small floats and machine-gun orders, a whole regiment of prices can be ripped to shreds before you find the main body of sellers. That's how stocks jump as they do. That's how it was in the first year of the dot-coms. That's how it is in every hot tech stock, where there simply aren't enough shares to go around to please all of the momentum funds.

Which is why, ultimately, when the underwritings start, and the lockups expire, and the Rule-144 stock gets filed (allowing insiders to sell stock that had hitherto been unregistered for sale), demand overtakes supply. When it is pumped out like that, as we are seeing in the market right now, the supply-demand equation switches. The gains are history. And the losses begin.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.