Not all of the forces shaping stocks r external; some reflect...

Not all of the forces shaping stocks r external; some reflect shifts in internal workings of the markets. Among the most notable: an explosion in hedge funds.

These private investment pools control $560billion in assets, almost double the amount two years ago. And in a down market, many shift heavily from buying stocks to"shorting" them-- selling borrowed shares in hope of replacing them when they`re cheaper. As the market slid, money has poured into these funds from institutions and wealthy individuals looking for a haven.
Sensing that stocks still have room to fall, hedge funds have stepped up their selling, putting serious pressure on the market.

A lot of people r shorting, just like they played the momentum on the way up, hedge funds are doing it on the way down.

At some point, hedge-fund managers have to buy shares to replace the borrowed ones they sold.

"short coverings" is partly behind wild trading days.

The hedge funds` actions, in turn, affect those of mutual fund managers. These managers feel pressure to beat or at least match major indexes. In the 1990s,this forced many to buy big stocks that dominated those indexes, such as General Electric and Cisco Systems. But as the market has fallen, some managers have dumped these same stocks to try to keep from falling behind the indexes. Some have shifted into other market segments, such as small stocks, that have done better. All this has created something of a herd effect, with few investors willing to stand in the way of a sliding market to buy big stocks even if they look cheap.

The absence of buying throws kerosene on the fire and causes lots of volitility.

Meanwhile, institutional investors have become more short-term-oriented. They feel pressure to sell stocks as the market falters rather than hold on for the long haul. This adds to the volatility,though it eventually could turn around and help the market rebound.

As index investing and hedge funds have soared to prominence in the U.S., a shift in foreign money has also changed the shape of U.S. stocks. Realizing in the1990s that returns in the U.S. outstripped those at home, foreigners surged into U.S. stocks. their purchases in 2000 almost equaled those of U.S. mutual funds.

Now the money`s going the other direction. According to most recent data, foreign investors put $26 billion in new money into U.S. stocks in the first four months of this year, down from $47 billion in the same period a year ago. Most analysts say the buying has slowed even more dramatically in the past month and has likely turned to outright selling by many foreign investors.

If the dollar stops plummeting, these investors may come back. But because the outlook for U.S. corporate profits is no better than the foreign profit outlook, their buying may be meek.