Stocks have been in free fall for most of the past week, as fear has mounted and hope has faded. Virtually everything we've been talking about over the past year has been coming to fruition in a paroxysm of pain. All the debt, all the excessive leverage, all the weak business plans and wishful thinking are coming undone at once.

The heat in the market now is coming from forced asset liquidations. Every hedge fund that borrowed tons of money to buy distressed debt and stocks are getting margin calls, and they must sell everything that isn't nailed to the wall to meet their obligations. That is why the selling has been so relentless. It's not short sellers. It is people who have to sell stuff to raise collateral or cash just to meet the terms of their contracts with banks and brokers that lent them money.

So what you saw on a day like yesterday when the CBOE Volatility Index ($VIX) climbed to 35, which is well above its highs for this year and challenging the highs of the 2002 market, is people buying option protection at any price. The advance of the VIX is the ultimate psychograph of terror.

Everyone who's been in the market for a while knows that a high VIX presents the best time to buy. As traders, we are conditioned to take advantage of others people's panic. However, the other side of the coin is that the VIX can rise right into a crash before turning around. So this presents a bit of a problem. You definitely want to buy a rising VIX, but if you make a mistake by one day it can be a pretty lousy decision.

I'm always reminded of the story of a friend who has been trading since the early 1970s. He told me once that every indication from his fear-o-meters pushed him to buy the market heavily on Friday, October 16, 1987. He only missed it by one day, but what a day. In the next session, after a weekend full of contemplation, the market opened down 10% and by the end of the day it would be known as Black Monday. That's called being 99% right and 100% wrong.

My recommended game plan is that we remember that selling does not make a bottom - buying does. So right now our posture should be oriented toward being ready to cover short sells and being ready to buy, but not doing so in a significant way unless we are sure that we are in synch with a provably large group of those who are similarly inclined...

Let's face it: We're witnessing deteriorating conditions in every region, every market cap group, and every sector in the world with the long exception, strangely, of the U.S. dollar.

Yes, I said the dollar. Check it out for yourself. Every major market around the world is in a bear phase, including Europe, China, the United States, Latin America, commodities, techs, financials and retailers. And the one instrument of any type that is going up is the U.S. dollar. It broke out of its downtrend in July coincidently with the decline of crude oil and natural gas prices, and has been on a tear ever since.

What I think is happening is that hedge funds that were heavily long the commodities this spring found themselves unwinding their positions in July - and the move got out of control. Everyone wanted to sell at the same time, and there were no bids. This is the kind of fast-cascading value destruction that can destroy investors who are trading heavily on margin.

And that is likely why we learned recently that the big commodity trading fund Ospraie Partners, partly owned by Lehman Brothers (LEH), was forced out of business. The fund announced it had suffered losses north of 25% in August, which triggered an exit clause for limited partners, and redemptions were immediate and devastating. It's the liquidation that was forced by redemptions that probably caused the big downdraft in commodities late last week and early this week, and could very well continue until all of their positions are sold and covered.

In this environment, I think we need to continue to tread carefully. My Trader's Advantage subscribers have made some good money in recent weeks, all things considered, with some calls and puts, as well as with limited expectations on common stocks paired with tight stops. This is not a time to really think about holding stocks or options for long periods of time, since we're still hemmed in that narrow 3% to 5% box. Frankly, I don't think my strategy is going to change much going forward--at least for now.

In the meantime, stay alert and I'll be back with more developments as they unfold...

The Financial Times just posted an article about the low number of retail investors in U.S. equities. I think it warrants some attention:

Individual ownership of US stocks has fallen to a record low, underscoring the increasing importance of institutional investors in domestic equity markets, according to a report to be released today.

Retail investors owned 34 per cent of all shares and 24 per cent of stock in the top 1,000 companies at the end of 2006, the last year for which figures are available, said the Conference Board, an industry group. Both numbers are record lows.

By contrast, individual investors owned 94 per cent of all stocks in 1950 and 63 per cent of all shares in 1980, the group's 2008 Institutional Investment Report said.

Institutions - defined as pension funds, investment companies, insurance companies, banks and foundations - held 76 per cent of the shares in the biggest 1,000 companies, up from 61 per cent in 2000, the report said. The 66 per cent share of all stocks held by institutions was up from 63 per cent two years before.

Halliburton (HAL), the world's second-largest oilfield services provider, told Bloomberg last week that the recent 17% slide in crude oil is unlikely to reduce orders for drilling and exploration contracts.

"Customers are basing decisions on significantly lower oil prices, and they plan very long-term projects that don't switch on or switch off based on the oil price,'' CEO David Lesar told Bloomberg. "I don't really see it having a major impact on our business.''

Halliburton opened a second headquarters in Dubai last year and has its biggest operations in Saudi Arabia, where it is the leading drilling services provider for the new Khurais oilfield. HAL just won a contract to provide services at the new Manifa offshore field. The long-term prospects for this energy giant look bright. But if the bear market really takes hold this fall, all stocks are likely to go down together. HAL shares have been hanging in there as well as any of its peers, but watch it carefully. A decline below $41.50, particularly if it's at that level at the end of August, would be a serious sell signal.