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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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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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