Welcome to the Green Hole By Thierry Martin 6/26/01 11:47 AM ET

Several weeks ago I wrote a column suggesting that the markets were about to begin an upward march toward a Double Bubble, and that they would revisit their old, absurd highs. Now, it seems that an entirely new effect is taking place. We are being sucked into an unprecedented Green Hole.

The Green Hole is the necessary opposite of the "Bubble" -- the anti-bubble, so to speak. It has never occurred, which is why you have never heard about it, and it is why no one is prepared for it. And it also explains why all of the experts are shaking in their boots as they predict how the market will start rising again any day, even though nobody actually believes it.

You knew someone would have to pay the price for the shameless behavior of the markets over the past couple of years. Just as the market displayed an animal instinct during the incredible bull market 18 months ago, you can't deny that the current atmosphere is now one of resigned hopelessness as the investing and trading community flogs a dead horse daily. The major indices behave like wet noodles.

While the few survivors of the brutal downturn try to kick-start the resumption of a bull market, one mutual fund after another gets swooshed away as the retail crowd sells everything it owns -- so its members can eat after losing their jobs without warning.

Money is sucked into the Green Hole by professional traders -- who, with their long-established network, trade their inventory back and forth at hideous price levels. Amateurs are forced to regurgitate their stocks before the carnage gets worse. Every margined account holder is tricked into a buying frenzy as the price jumps up by quantum leaps, just long enough to trap a new crop of reborn bulls before a dramatic U-turn.

Many traders have adjusted to their embarrassingly reduced account sizes by playing options. They then watch the price of the underlying stock rise quickly, but as time goes by, premium and volatility adjust simultaneously and inversely with the price of the stock. So the more the price goes up, the more their call options lose value, and they are again negative.

The traders get smart and buy calls and puts -- but then they learn that once we are in the Green Hole, both calls and puts can lose on the day.

You know we are suffering from the Green Hole effect when every analyst raves about a stock and the price drops week by week. The more it drops, the more they love it -- until it has dropped ridiculously. Then the analysts admit their mistake and discontinue coverage, citing "concerns."

Plus, in the Green Hole:

You trade very small lots, and away from the crowd. But you still feel that the entire market is rigged against you. You are pretty sure that the institutions are calling each other to make sure that your silly little 100-share purchase never, ever rises enough to cover your commission price, even if they have to lose millions in order to nail you to the wall.

In physics, one of the basic laws is that for every action, there is an equal and opposite reaction.

What now appears to have been a period of stock market madness over the past two years may have resulted in a return to normalcy. This will require us to adapt to a different reality and learn new ways to make money in this very difficult environment.

Warren Buffett recently opined that stocks may be "boring" for the next 10 years.

Welcome to life in the slow lane.

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Using the pseudonym Fiasco Del Fuego, Thierry Martin picks stocks every day for the Web site Fiasco Trade of the Day at www.fiasco.ca. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Martin cannot provide investment advice or recommendations, he welcomes your feedback at Thierry Martin.

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