The S&P 500 (^SPC) managed to contain its losses to less than one percent in, even by recent form, an unusually tumultuous session. The sentiment across the markets went through phases of fear and trembling that Bear Stearns could not be an isolated case to waves of semi euphoria that this might just be the kind of event from which an inflection bottom could arise.

While traders may be disappointed if the Fed fails to deliver at least 75 basis points today, many are now expecting it to be 100 bps, there are increasingly disturbing developments in China where the central government is preparing to hike rates to ward off inflationary pressures. Diverging from the Nikkei in overnight trading the Shanghai Exchange (^SSEC) and the affiliated Hang Seng Index (^HSI) are still in firm downward trajectories. The Shanghai index closed with a four percent decline and after peeking above the 6000 level in October now seems to be headed towards the 3000 level.



The DAX index in Germany (^GDAXI) was one of the weakest markets in European trading yesterday. In fact the SMI in Switzerland outpaced it on the downside with a more than five percent drop which can le largely attributed to a rout in the shares of UBS.

The DAX lost 4.2% and closed more or less on its intraday low. It will now face stiff resistance on the rebound at the 6430 level which provided support throughout last week's buffeting.

London's FTSE also suffered with an almost four percent decline and one of the contributory factors was an almost 10% decline for Barclays which had been an owner of a substantial stake in the equity of Bear Stearns. But the story that is concerning many is the plight of sterling, which reached record lows against the euro yesterday, and a fear that international capital flows may be steering clear of the UK because of the strong parallels between structural issues in its economy and those now causing havoc in the US.

One of the main supports for the UK economy, and super inflated London residential real estate, has been the inflow of funds as footloose wealthy individuals from Russia, Asia and the Middle East, after shopping around for the most favorable tax regime have, until very recently, reached the conclusion that the UK is the world's most desirable onshore tax haven. In another instance of how fiscal and monetary policy has now become captive to propping up the capital markets the government of Gordon Brown is having to take a more conciliatory tone to the non-domiciled "residents" as capital flight from sterling and a property crash in London would see the UK enter a vicious downward spiral.



Despite the sea change in Fed policy which allows investment banks to gain liquidity for their arcane financial instruments, the broker/dealer index (^XBD) still slumped by more than 10% yesterday.

One of the real problems for the sector is that with the securitization business almost dead and buried, a major earnings stream has now dried up. Traders are discounting a slump in future earnings as much as selling because of concerns about liquidity implosions.



The stock for Lehman Brothers (LEH) yesterday reminds me of the scary skydiving experience. Reports emerged during the session that some financial institutions were instructing traders not to engage in counter-party risk with the troubled bank and the stock looked as though it could plunge. More than 200 million shares were traded and, it is a sign of the times, that an investment bank which lost more than 20% in just one session could have been said to have had a "relatively good day".



Momenta Pharmaceuticals (MNTA) has a complex and unorthodox pullback pattern but it still appears that the buying surge on February 29 will see some follow-through.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

Disclaimer
The purpose of this article is to offer you the chance to review the trading methodology, risk reduction strategies and portfolio construction techniques described at tradewithform.com. There is no guarantee that the trading strategies advocated will be profitable. Moreover, there is a risk that following these strategies will lead to loss of capital. Past results are no guarantee of future results. Trading stocks and CFD's can yield large rewards, but also has large potential risks. Trading with leverage can be especially risky. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital.