Exactly one year ago the Dow Jones Average hit a new high, completing a manic rally following Federal Reserve and Treasury actions (rate cuts, the still-born MLEC) to address the credit problems that bubbled to the surfaced over the summer of 2007.

Now, of course, the market is making new five-year lows daily, following vastly larger and concerted world-wide government actions (more rate cuts, trillions in guarantees and liquidity infusions) to address the credit freeze which now threatens the global financial architecture. While last fall, all we heard was that the problems were “contained” and the worst we faced was a “slow patch,” now there is open speculation about a new Great Depression and even the break up of the European Union. What can we draw from this, or rather, what can we draw from this that hasn’t been droned over endlessly by pundits and economists?

One lesson is that we have to realize that normal market dynamics no longer apply during this extraordinary period. For instance, one obvious conclusion would seem to be that the bull psychology – “Buy the dips!” – of last fall, has finally been replaced by a bear market psychology – “Sell the rallies.” It’s demonstrably true: Rallies that lasted weeks last fall now seem to last minutes.

But simply looking at emotions for market moves may miss what lies beneath. The bear market psychology driving markets may actually be the product of a more fundamental market driver: forced selling.

Once de-leveraging takes on a life of its own, technical factors can overwhelm otherwise reliable market tells such as psychology and sentiment. Much of the selling of the past weeks has taken place not because investors wanted to sell but because they had too. If anything, many people are tempted to buy now that valuations have been knocked so badly. Every time a buyer dips a toe in (e.g. Thursday morning), however, new waves of selling overwhelm the rallies, most likely coming from funds that are desperate to raise cash to meet redemptions or margin calls.

Some indications of forced selling have been anomalies, such as gold mining stocks falling last Monday even as the metal itself soared by $35 an ounce. Or, to take an example from the credit markets: A few days ago Visteon (VC) bank debt traded well below the prices of the company’s 12.25% subordinated bonds even though the loans were senior to the bonds in the credit structure. The need to raise cash imposes correlations on uncorrelated strategies, and it produces bizarre anomalies in the equity markets such as investment grade stocks stocks do worse than the dogs even as the markets plummet.

It’s not just redemption notices that have caused forced selling. As the credit markets seized up, many funds were forced to de-lever, if not close, as their lenders pulled back. This produced new selling pressure, further depressing results, and in turn, producing fresh casualties and more forced liquidations, and so on. No one wants to get in front of this train, and this in turn produces more fear of what might happen in the future.

Conventional market wisdom (“Buy to the roar of cannons…”) would suggest that with fear rampant, now is a great time to buy. Tell that to someone who bought two weeks ago, or during any of the periods over the past few months when fear also ruled the markets. Before jumping in again, it might be prudent to look beyond sentiment to other indicators of where we are in the de-leveraging process.

Even a cursory glance suggests, to me, that we still have a long way to go. Many households, for instance, have barely begun to face a life of restricted access to credit at best, and joblessness at worst. A veritable centipede of shoes have yet to drop, and the pending footwear include an inevitable surge in defaults and bankruptcies. To top it off, even as market commentators speculate about the possibility of a depression, the NBER hasn’t even officially declared that we are in recession.

At some point, forced selling will abate -- it has to -- and the fear index might once again become a useful contrarian indicator. We can only hope for a return of those innocent days.