Why did the market fall so heavily on Monday?

Although there is obviously lingering concern even though The Big Bailout Bill passed on Friday as well as concern due to banking difficulties in Europe, the heavy selling on Monday was really mostly due to technical trading related to the Dow being near 10,000. With weakness and anxiety in the air, pushing the Dow below the psychologically important 10,000 level was quite appealing to traders. And once that trading support level was breeched there was intense piling-on by speculators and day-traders which led to the 800-point intra-day decline. The day-traders of course had to close out their short-positions by the end of the day, leading to a so-called "recovery." The Dow did not recover fully from the selloff since a lot of people were truly horrified by the decline and did not buy back after selling. In addition, there is probably still at least a modest level of ongoing selling pressure due to nervous retail investors who have no idea what to do during a crisis.

I am not completely convinced, but the intra-day decline on Monday may in fact signify "capitulation" in the technical sense. OTOH, sometimes capitulation requires several of these days in a quick succession. Then again, sometimes one quick, massive plunge actually does the trick.

Meanwhile, Treasury and the Federal Reserve are actually busily at work helping the banking system to improve its liquidity. It may seem stupid that they insist on doing it one bit at a time rather than all at once, but the issue is that nobody knows exactly how much "enough" is and it actually makes sense to only give the banks as much as they can really handle at one sitting and to keep that process going until the banks actually do settle down. Besides, the banks really do need to divest themselves of their so-called "toxic" mortgage securities and the Treasury bailout program simply is not operational yet and won't be for a few more weeks. In the interim, I do expect that we may see a few more special deals for banks that may come under exceptional stress, especially if the stock shorting restrictions are abandoned, or even if the restrictions are kept in place since I believe that there are too many loopholes to get around the restrictions, not to mention no detectable enforcement for hedge funds which illegally bypass the restrictions.

-- Jack Krupansky