LEHMAN BANCRUPTCY AND OTHER FINANCIAL PROBLEMS LEAD TO SHARP GLOBAL SELLOFF -- BONDS RALLY AS COMMODITIES FALL -- HUGE SPIKE IN PUT/CALL RATIO MAY CARRY SOME GOOD NEWS

BROKERS ARE BEING HIT HARD ... A combination of unprecented weekend financial events have put global stocks under heavy pressure. Lehman filing for bankruptcy, Merrill being sold to Bank of America, and AIG scrambling to stay afloat have created a financial storm in early trading. Bonds are the only asset class rallying as stocks selloff. Financials are the day's weakest sector. Chart 1 shows the XLF slipping back below its 50-day average today. Most of that selling is in brokerage stocks. Chart 2 shows the Broker/Dealer Index (XBD) falling to a two-month low. All market sectors are in the red. The two holding up better than the rest are consumer staples and healthcare which are defensive sectors. Energy shares are also falling harder than most as energy prices fall sharply. With the exception of gold, most other commodities are also in the red. The dollar is trading mixed. It's up against the Euro but down against the yen.

Chart 1

Chart 2

SENTIMENT GAUGES SOAR... A week ago, I warned that the CBOE Volatility (VIX) Index and the CBOE Options Put/Call Ratio (CPC) were too low to support a market rally and looked more bearish than bullish. The good news is that both measures are jumping sharply today as stocks fall. Chart 4 shows the CPC jumping 52% to the highest level in eight months. The good news is that the CPC is nearing a level near 1.50 where market bottoms have occurred in the past. My advice is to sit tight. There's little anyone can do at this point anyway. It's too late to sell and too soon to buy. The spike in the put/call ratio suggests that bearish sentiment is too high at the moment. That could lead to some type of climactic bottom in the near future. Keep in mind also that September (and early October) are very dangerous months for the market. October is also the month when significant bottoms often occur. Todays sharp selloff may be setting the stage for the type of washout that the market needs.

Chart 3

Chart 4