Knockout result...

Yesterday, we asked the question whether this market can maintain at least a couple of days of positive momentum following GSE bailout...".you have the potential for a short covering rally.  This is what we saw early today, but how long it lasts depends on how fast  'confidence' comes back (if)".     Well, today we have an answer that is loud and clear due to LEH uncertainty.    Never mind DJIA gave back the entire gain from yesterday,  SPX gave back gains from yesterday and Friday.    Nasdaq, well, it never participated in any rally last three days.

You may think today's drop was purely because of LEH,  but its issue cannot simply affect all of the S&P500 components or simply everything else.   From what we can tell, there's definitely a thick cloud of fear and panic out there that people simply wanted to be out of the market before it gets any worse.     The reasons are simple,  if we get a global economic slowdown, many of the companies that have heavy international exposure will have their estimates dramatically reduced.     The way it works with Wall Street is that nobody waits for actual confirmation before acting.     Of course, the slow reacting ones are always the actual analysts who cover the stocks.

If you are remotely uncomfortable looking at stocks, never mind trading in this current environment, cash is still the KING for you.     For most traders/investors, staying in cash is simply the best way to preserve capital and to survive through this carnage.    Keep in mind, what's happening out there isn't slow grinding action like in a true bear market.      What's happening during the last few trading days has capitulation feel to it around the corner.  Risk appetite for investors is dwindling and many are just uncommitted to throwing money into it until the markets break to the upside or downside (capitulation)

Lets take a look a few key sectors here...

Financials, what happened to FNM/FRE is simply an exception as the government had no choice but to bail them out.   Too much was at stake with the duo and so it's inevitable the bailout action was taken.    We think for other financial companies, they may not even get the benefit of any further government help.    So basically, you draw your own conclusion, as we've said months before, we think it will take an awfully long time before we see any stability in the sector.     Housing market is also a key and we'd watch for monthly data to see the progress in that area.    The easy money may have been made shorting the sector, but we feel if the key support gets broken on XLF, we have no problem of jumping further on SKF . Today's alert based on LEH was an easy 5 pts as things deteriorated by end of day.  Considering LEH will most likely hold a CC tomorrow,  it's best to close out the position and go with the news flow in the morning.

Techs.. things are not looking good from the trading last three days.    Clearly, people want to get out of all of the beta names on any rally.   We noted back in Aug. that there's still too much optimism / expectation on upcoming earnings report for most of the tech companies.    Perhaps,  DELL, GLW and NOK provided a wake up call for those believers and the action is taken last few days to avoid any surprising disappointment.    We aren't doing anything in this area until smoke is clear.

Commodity Stocks,  wow and simply wow!    This is the only area we feel that's going through true capitulation.    People are simply dumping anything and everything left and right.    Oh yeah, it's been going on for days now!    However, we feel this is the area that is closest to a bounce compare to rest of the market.     Yes, global slowdown in economy will hurt these plays, but a drop of 30 to 40% within few days will call a potential bounce into play.  We noted in conclusion yesterday this is something we are anticipating.    The volume on many commodity plays is getting an extreme unwinding feel and that's a good sign for a potential short term bottom to occur.     We are praying for a gap down tomorrow actually to get this into play on the long side trade.  Otherwise, some good news out of nowhere, a weak USD, something..anything to do with these groups for an intraday trade.

In conclusion, every trade you make is on a short leash as any development (eg. LEH today), tosses out any trade ideas/holds you may have.   Market is in a very fragile state and living off any headline to turn one way or another.