As most traders have figured out, HSX is in one of its Bear Markets, where all stock prices go south, and great deals sit ignored. These are tough times to play the game. In my cinemeconomic opinion, the current Bear Market is caused by:

1) A bunch of stocks grossing below market expectations, like FALLE, HRDRN, and PHANT. Others have done above market expectations, but evidently very few people held them. With money being destroyed, average prices on the exchange will fall as the deflationary effects kick in. Also, since traders like quick action, I suspect there is lots of buying and selling as people try to catch a winning stock and sell off the stagnant stocks in their portfolio. The commission charges on these sales are all deflationary as well.

2) A money supply miscue by HSX. The last few weeks have seen huge money supply fluctuations caused by the New York Times newbies and the Christmas stock delists. This normally would have been very, very inflationary, causing prices on the exchange to rise to ungodly levels. But, to their credit, HSX did some monkeying around with volatility, or the orders placed by the Virtual Specialist Twins, or both, to keep the market stable and avoid having traders see no good buys when they logged on. However, like all Central Banks do from time to time, they overcompensated, and held their foot on the break too long. Now that the delists have all gone through, and stocks have lost money, they need to put their foot back on the accelerator.

3) In his column this morning, HSX’s own Alan Greenspan, Dr. Zeros, sees a time when “The Internet, so to speak, breaches the light barrier and introduces the possibility of sychronicity and psychic equity as new standards of wealth”. This statement caused a panic among traders fearing that New Ageism in HSX’s central banker might cause him to neglect stocks in favor of crystals, tantric sex, yoga, and another harmonic convergence.

So, what do you do during a Bear Market? Here are two strategies:

1) Cash is King. Switch to cash or high yield bonds to gain positive interest while the rest of the market stagnates. On saturday mornings, buy back in for any weekend openers you think might do well. Otherwise, stay out of stocks until the market recovers. Upside: You won’t lose money except on any poorly performing openers. Downside: Bear Markets end, and usually end quickly. If you are late in recognizing when the market turns bullish again, you might miss huge gains.

2) Grin and Bear it. Take your lumps, buy the stocks which are horrendously undepriced, and wait for the inevitable day of reckoning when they go back up, knowing that this might not happen until their opening weekend. Upside: eventually stocks will be corrected, and if it happens early, you won’t miss out. Downside: It might be painful in the meantime, watching valuable stocks sink lower and lower, knowing you could have sold at $5 and bought back at 25 cents.

Which strategy is best? It depends on what you think HSX will do. If they play it laissez faire and let the market correct itself, stocks will stay deflated until some major cash cow comes along such as a big delister (GOODW might qualify next Monday), or a big opener that everyone sees coming (like MNIRN). In this case, you are better off going the cash route andbuying back the cheap stocks right before the new cash hits the market. If you think HSX will force a correction by playing with volatility and the Specialist Twins programming to stop the deflation, you might want to Grin and Bear it, since it can happen anytime.

Me? I’ll probably Grin and Bear it through next Monday. If the GOODW delist fails to kick the market out of its doldrums, I’ll switch to cash.

Tom Miller