Despite Rate Cut, Sell On Rally Still Prevails

While futures are at their lows, you would think that traders would have been in for hours, trading heavily. But volume is not that heavy; Chinese stocks down 10 percent-20 percent, and energy and material stocks are down 5 percent to 10 percent--but on light volume.

Why are the markets weak NOW? Peter Boockvar at Miller Tabak says most feel that the genesis of this global "puke" began in China when the Bank of China announced a likely writedown in its subprime mortgage exposure.

Separately, Dennis Gartman notes that puts that had been bought to protect portfolios last month expired Friday, leaving those portfolios exposed to selling. He also notes that Friday's downgrade by Fitch of bond insurer AMBAC's to below AAA may also have been a catalyst for selling.

Separately, the battle over whether the U.S. is still coupled to the rest of the world is over, for the time being. It is coupled. But it may not be as much as it used to be. Bulls are still arguing that the underlying economic conditions in these markets are better equipped to deal with the US slowdown than they've been in the past.

Will the Fed cut this morning? Most want it, but many feel it is unlikely. Some are hoping for a simple statement that they will meet all demands for liquidity and the discount window will be opened as wide as it could be.

Regardless, the mantra of most traders remains: sell the rallies. Their argument: in a bear market you sell rallies, not buy on weakness.

This, of course, is absent an unexpectedly aggressive Fed intervention or stimulus program

UPDATE: Good heavens, traders got what they wanted: an inter-meeting cut of 75 basis points! Futures rallied 40 points, but already, 4 minutes into the announcement, the "sell on the rally" mentality prevails: we are already 12 points off the highs.

Questions? Comments?