Talks within the US government on plans to take over the two firms have intensified recently leading to a spate of sell offs and pulling the global financial stock down. Under a 1992 law, if either is seen as undercapitalised, it would have to be placed into government conservatorship. Such an event would I believe scare the markets to a far greater extent than the Bear Sterns collapse and would lead to a large unprecedented sell off.

In earnings news General Electric report today and eager investors will be keenly watching the news for a market direction. Presently we seem to be pushing lower on the FTSE after a positive start. Oil popped $5 yesterday as Iran continues lobbing up missiles and gold also strengthened indicating a small move to safety.

My Play
Since everyone and their mother seems to be waiting to short the market it will be interesting to see do we get the spark that ignites the sell off. Not having the fortitude to sell at these levels (5380) I’m playing the wait and see game hoping for a large sell or small bounce. If we close below 5380 I would be increasing my bearish stance and expecting lower lows.

As the bad news intensifies and reaches wide scale press coverage the premise that you should be buying when everyone else is selling starts to come into play. If we are in a bear market no one really knows how low it could go or how long this takes to resolve itself. One certainty is that bear rallies will occur and selling short isn’t the only way to profit in a bear market.

My current concern is the death by a hundred blades syndrome. This is the effect of an indecisive market that doesn’t drop quickly but steadily goes lower and lower. Like a wave eroding the shore this would be a slow and prolonged and very painful place to trade. In this scenario the market could take a year or more to drop 1000 points. The rally would then be equally as muted.

I do want to short again and my long term prediction is for a lower market but without any bear rallies I don’t have the full force of my conviction to sell into this languishing market which takes me back to wait and see mode.

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