The recent behavior of Internet stocks makes it clear that the biggest factor affecting technology stock isn't day traders - it's interest rates. Evidence of strong growth causes prices fall sharply by making investors worry the Fed -- the chief growth-hater -- will raise interest rates. And when a low inflation number drives away the prospect of an imminent Fed tightening, prices jump. Ironically, this makes technology investors the biggest growth-haters of them all -- worse than bond traders!

There is a reason for this bizarre behavior; it's called duration. The duration of a security is a concept similar to maturity. It measures how long it would take for an investor to receive cash flow equal to half his investment i.e., half of the present value of the stream of future cash payments represented by the security. The longer the stream of payments, and the more back-loaded, i.e., far away, the stream of payments, the higher the duration. To illustrate the concept, the duration of a one year note is one. And the duration of a thirty year zero-coupon bond is 30 years, since it makes only one payment to the investor at the end of 30 years. But the duration of a 30 year bond, paying interest at six month intervals and repaying principal at maturity is about 11 years, since so much of the value is represented by the interest payment in the early years.

Duration also measures the sensitivity of bond prices to a change in interest rates. If interest rates rise by 1% across the yield curve, for example, the price of a bond with a 11 year duration will fall by 11 points, while a 30 year zero coupon price will fall by 30 points.

What's this got to do with technology stocks? A stock represents a claim on a stream of free cash flow payments, just like the coupons on a bond. The intrinsic value of the stock is the present value of those free cash flows. And you calculate its duration in just the same way.

Stocks have longer duration than bonds for two reasons. They have no maturity dates, i.e., in principle their free cash flow stream goes on forever. And, unlike bonds, their free cash flow coupons grow over time as profits increase. The S&P 500 duration, for example, is more than 25 years, about double that of the long bond. This means stock prices are twice as sensitive to interest rate changes as long-term bond prices

Tech stock durations are even longer than the S&P - 25-35 years -- because they have higher growth rates and the ultimate payoff in free cash flow to investors is many years away.

But Internet stocks have the longest durations of all - perhaps 30-50 years. Internet companies aren't making profits today and probably won't for a while yet. They are spending huge amounts of money now on infrastructure, which pushes the day when cumulative free cash flow becomes positive farther into the future. And their growth rates are huge. This long duration means a 1% move in long bond yields will whipsaw Internet stock prices by 30-50% as we saw earlier this year.

That's why when the Fed speaks Internet stocks listen. This leads to a bizarre rhythm in the market and an interesting opportunity for tech stock investors.

The technology boom, as I discussed in a previous Forbes.com article, has created an economy that has been growing twice as much as economists, i.e., the Fed, thought it would for the past four years. The Fed, using the discredited Phillips Curve model, thinks more growth means higher inflation. Every time a big growth number is released Alan Greenspan makes noises about irrational exuberance and scares bond market investors. This pushes interest rates up and tech stock prices down.

But technology also pushes product and service prices lower for all companies in the economy. This is taking place directly, as computing costs fall to reflect Moore's Law, and indirectly, as Internet visibility flattens prices and squeezes margins for middlemen everywhere. As a result, inflation has been only half the level that economists thought it would be over the past 4 years. So the interest rate increase caused by the growth haters has been quickly followed by a correction in the bond market and a surge of technology stocks when it becomes clear that demon inflation has once again failed to materialize.

This has created a wonderful trading opportunity for tech stock investors to buy on weakness. And it makes Internet stocks the weapon of choice for investors who want to bet against the Fed.