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Multiple Choice: Crash Test Dummies

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Final number central to investor psychology.

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"Tell me about it, Stud!"
-Sandy (Grease)

So you wanted to be a trader, eh?

I just walked out to the MVHQ pit and said to our crack editorial squad that this could be the most important session ever for the market.

Why?

The credibility of the Federal Reserve and Treasury--and psychology surrounding the faith in the system--is being tested in a big, bad way. Given the proposed rescue plan in Fannie (FNM) and Freddie (FRE), not to mention the action in the banks (BKX -7%), today's close is massive in terms of investor psychology.

There are a few scenarios here:

A) The action in the financials is capitulatory and, following the 56% decline since last year, we're gonna see a mean reverting bounce, perhaps back to BKX 60 (20%).

B) The S&P will play downside ketchup and we're looking at S&P 1050 sooner rather than later. Remember, the sharpest sell-offs (panic) occur during oversold conditions.

C) The tape stabilizes in and around here and the markets work off the oversold condition as a function of time rather than price.

As per my earlier Buzz, we're currently in the process of price discovery. Risk management dictates that we allow and account for all three scenarios and keep enough dry powder such that any of the above doesn't put us in the poor house.

Good luck, Minyans, and remember: Discipline over conviction as we find our way.

R.P.
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