CTC,
A couple of comments on your thoughtful post.
You say, So is the implication that position traders and momentum guys are entirely responsible for this behavior. If so, aren't we really suggesting that they play a zero sum game amongst themselves?
Trading activity is not a zero sum game amongst themselves because stocks trade at the margin, meaning a small number of trades relative to either the float or the overall trading volume can move the price up or down. Consequently, more people can win (or lose) than are represented by the trades that move the market. Unlike, say, options where for every winner there is a loser. That's why the Momentum Morons can drive, say, AMZN, into the stratosphere, regardless of fundamentals. The greater fool theory turns out not to be zero sum. It's just hard on the last guy in line.
John Maynard Keynes was once asked about his own trading activity and he likened it to a beauty contest where the object of the game was not to pick the most beautiful contestant but the contestant everyone else would pick as the most beautiful. Since everyone else was playing that game, too, the winner turned out to be the person who got closest to picking the contestant that everyone else thought everyone else would pick. A convoluted explanation of auction markets but a good one. People buy things from soap to stocks for all sorts of reasons. Whether they buy stocks for reasons of valuation, technical analysis or the stocastic implications of chaos theory doesn't matter. What matters is understanding the appeal of a particular stock to various styles of investors. Obviously, this week's hot Internet stock has very little appeal for fundamentalists, and low volatility cash cows have little appeal for momentum morons. It's not about being right. It's about making money and understanding what other people find appealing in a stock--fundamentals, technicals, whatever--goes a long way toward making money (and avoiding loss).
Best,
--Steve
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