Investors not only returned to a shortened trading week after the Labor Day holiday, but also to a stock-market bruising - at least for those with long equity positions.

Concerns about the global economic outlook and continued financial duress spooked bourses around the world. A number of other factors also adding to investors’ nervousness: In particular, Pimco’s Bill Gross, the manager of the world's largest bond fund, said the US needed to step up and buy assets to avoid a “financial tsunami,” Dwight Anderson’s big Ospraie commodity hedge fund closed after suffering large losses, and Russia was selling foreign currency reserves to prop up the rouble after foreign capital fled the country after Russia's invasion of Georgia.

Stock markets and commodities ended the first week of a typically grim September deeply in the red, but government bonds and the greenback benefited from deleveraging and a flight to perceived safety.

The bailout and recapitalization of collapsing home mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) will indeed go through.

I've mentioned previously that the mid-July stock market lows need to be sustained in order for the summer rally and the market’s base-building to still be in effect. These levels --10,963 for the Dow Jones Industrial Index and 1,215 for the S&P 500 Index -- approached with unnerving speed last week.

Commenting on the current market weakness, Brett Steenbarger (TraderFeed) remarked:

“A number of sectors, such as consumer discretionary and even many of the financial shares, remain well above their July lows. It is not at all clear to me that this will be a fresh bear market leg down. I'm open to the idea that this may be an ultimately successful test of the July lows and part of a larger -- and quite significant -- bottoming process. Participation to the downside will tell the story.”
 

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From across the pond, David Fuller (Fullermoney) added:

“...Investors have little incentive to channel the large capital pools accumulating in money-market funds back into stock markets. Resistance near the August highs for share indices has checked the rallies. Moreover, many have broken beneath their August lows this week. We have also seen some new lows for the year, reaffirming overall downward trends. Unless stock markets can push back above their August highs, the bear will remain in charge for a while longer.”

The last word goes to Richard Russell (Dow Theory Letters):

“Yesterday's [Thursday’s] stock market action, according to Lowry's, was a classic 90% downside day. Normally, such days are followed by 2 to 7 days of rally (bounce), and then a continuation of the downtrend. 90% downside days often come in a series of one or more, and after each 90% downside day we look (hope for) a 90% up-day. And that’s where we are now.”

Economy

“Global business sentiment has been more or less consistent with a global economy that is near recession since the subprime financial shock hit over a year ago,” according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com. The survey did take on a slightly more upbeat tone at the end of August, as pricing pressures abated a bit, sales strengthened somewhat and hiring firmed modestly. Businesses remain most dour in the US, Europe and Japan, and most upbeat in the rest of Asia.