When fear feeds on itself

An interesting thing is happening in the markets recently which is almost a mirror opposite of how things were just a few years ago. Since most people understand things going up better, it's somewhat easier to imagine how the dot com boom transpired, or how the investment banks/hedge funds could leverage to 30x capital, etc. Unfortunately, the flip side i.e. the compression side of things happens much much faster and is way more painful to watch. A number of hedge funds have received redemption requests from their clients. In fact, the Lehman failure and the AIG near death experience have strained markets to an unimaginable extent, leading to severe margin calls and further forced liquidation!

The VIX ("fear" index) is very high which usually means that a lot of uncertainty is already built into valuations. However, this is the exact time for things to get from bad to worse. Do not be surprised to see another of those whopper down days in the near future. Although I think 3 months down we will be better than now, be very cautious of short term directional bets. Caveat emptor.