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We've had two down days (more volatile than down) in Micron (NASDAQ:MU), 9/12 and 9/13, after a 23% gain in 10 trading days. The stock added 5% on the day of the Hynix fire alone.

What in the world would make this stock decline on two days where the spot price on DRAM made new highs and new reports claim the damage to the Hynix DRAM plant is much worse than we thought or than Hynix told us? Depending on who you choose to listen to, the Hynix fire is a three month interruption or a six month disaster. Today DRAMeXchange reported 2Gb spot price of $2.15, 156% higher than the low of December 3, 2012. Maybe more important, the 4Gb chip had a spot price of over $4.00 -- $4.02 to be exact. That is up about 165% from the low.

At the low, PC DRAM was selling for a negative 50% gross margin. That would put the cost of a 2Gb chip at about $1.25. Today's spot price would produce a gross profit of about 42% for that part. The 4Gb part, which is rapidly making the 2Gb part a thing of the past, is generating a 60%+ gross margin based on the $4.02 spot price of this morning.

So, has the magnificent run that Micron has had in the past year come to an end?

Not even close. Start to get concerned around $40 per share.

What happened the last two days was Market Maker driven. Let's see if we can figure out how and why they do that.

Those of you who read the articles that I write know that a long, boring story is coming before I make my point.

Have you ever wondered how and why Market Makers can cause a stock price to decline in the face of contradictory indicators?

Have you ever wondered how the Carl Icahns of the world can take huge positions in a stock without making the price rise significantly? And how do they sell a huge position without depressing the price?

The Market Makers do it. The purpose of a MM is to maintain an orderly market in a security. They have kit of tools that allow them to do things that would get you and me put in jail. One of those things is naked shorting. Legally. It's part of the special powers given MMs in order to keep markets "managed."

The day of the Hynix fire, September 5 in China and September 4 in the US, Micron traded 117 million shares, or about 11% of the float. On September 10, 80 million shares were traded against an average trading day of about 40 million shares. Both days had substantial gains. There's little doubt that many of these shares were made available by Market Makers using naked short selling to provide the shares to the anxious buyers. Now, like any other short seller, naked or not, these shorts have to be covered, preferably, from the MMs' perspective, at a profit.

Here comes the boring story:

A bunch of years ago I came across an article in Scientific American titled, "the Science of Persuasion", written by Dr. Robert Cialdini (and, yes there is a book). I would highly recommend clicking on the link before moving on; it was an epiphany for me. It turns out that there are only six principles of persuasion or influence. Virtually every attempt to influence you involves one of those six principles.

One of the six principles is "Scarcity." Scarcity simply means that people tend to want more of something that is less available. If you don't believe that, put a couple of two year olds in a room with one desirable toy.... and watch WWIII break out!

A corollary to the Scarcity Principle is the psychological truth that humans are much more sensitive to losing something they have than they are to gaining something that they desire. In later work, this sensitivity to not losing something over gaining something has been quantified at between two and three times more powerful than the motivation to gain something.

How this works in the stock market is that as a share price declines, the holders of that security tend to sell in order to not lose what they already have. They also stop buying for fear of losing something they have (money). This selling with no buying tends to suppress the stock price even more, with more selling. So, if the Market Makers find themselves in a bind on a bunch of naked shorts, they need to start the stock price moving down in order to shake loose the shares they need to cover the naked shorts and at a price that will be attractive as well. One way to do this is to sell or short into the pre-market. That happened on both Thursday and Friday. Another way to get a stock started down is the use of various "FUD." In this case it was an article in Forbes late Thursday that highlighted an increase in the short interest in Micron. Now this article is ridiculous on its face since the reported information is two weeks old. The NASDAQ could report short interest on a daily basis if they wanted to, but they don't want to. So, we have FUD in the form of a higher short interest that was probably caused by the Market Makers doing their job in addressing demand for a hot stock.

At the end of the day, the MMs have to get covered before Micron publishes earnings and the pro forma on the Elpida acquisition or they stand to lose some real money.

Here's where market making and the scarcity principle intersect: Selling a stock is 2-3 times more effective at reducing the price than buying is at increasing the price. So, if a trader or MM dumps 50,000 shares at the market, he can probably buy 2-3 times the 50,000 shares back in smaller pieces and just move the price back to where it started. If you do this repeatedly, you can get a naked short position covered without a squeeze. Using the same technique, a large position can be established without running the price up. Of course the MM has to be involved and can pull it off... for a price... for a special client.

This is the kind of thing that happened to Micron on Thursday and Friday. The stock was down significantly on nothing but good news, but recovered to close in the green by the close. The net result of the two days was a price decrease of $.29 or 1.8%. Pretty much nothing to worry about, but the intraday volatility would make any investor nervous as a "long-tailed cat in a room full of rocking chairs." I'm guessing the MMs either covered their own short position or they established a large long position for a major client. Either or both of these efforts are good news for us little guys. It's hard to hang in there when these artificial and short-term retracements occur, but don't let them scare you out of your shares.

Obviously Market Makers have many other resources involving synthetic positions with puts and calls, and others methods that make my brain hurt, but this is a conceptual and psychological look at only one method Market Makers use to (legally) manipulate stock prices.

Playing the stock market is more like a mud-wrestling contest than a pillow fight.

Jim Cramer was caught on video discussing some of these techniques, except in his case the actions were not legal.

Micron: The memory prices are making new highs every day, demand is expected to exceed supply, consumption is increasing, you have a major competitor cleaning up a crippling fire, oh, and costs continue to come down. This is a positive perfect storm for the memory industry and Micron in particular.

Some pundits prefer SanDisk (NASDAQ:SNDK) over Micron. I don't for the simple reason that solid state drives and many of the future memory products will be combination of DRAM and NAND. SanDisk will have to buy the required DRAM from one of only three DRAM manufacturers remaining. I consider this a major weakness for SanDisk.

Disclosure: I am long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Micron And Market Makers