Here we go!

I've written several times, as recently as here, about how markets tend to fail and roll over.

It is almost never from the actual market itself. But the cracks have to be there.

Think about a pile of bricks, single stack, nice and narrow. Mortar it all together and its pretty solid. You can knock it over, but it takes quite a bit of effort.

Now go chisel the mortar out between every 10th joint, and try again. Its a lot easier.

Now keep chiseling. As you chisel out more mortar, the wall gets weaker and weaker, until finally a nice healthy spring breeze blows it over!

China dropped 4.5% overnight when their GDP number came out hotter than expected, raising speculation that there is an imminent rate hike coming from their central bank along with possibly other measures.

This, by the way, also whaled on the dollar overnight. It was down 83 pips and is now at 117.82, below the important 118 psychological barrier.

There are other reason to be concerned about more cracks in the wall. DH Horton this morning announced earnings and very nearly posted a loss. They also lowered guidance; expect them to get slaughtered this morning.

E*Trade reported earnings last night and was promptly taken to the woodshed as well; their report wasn't awful but their guidance disappointed. Expect more weakness there today.

Now add to this, we have this private equity bubble that's inflating. Its starting to smell frothy - we're not talking about companies buying each other for strategic reasons anymore - now its all "LBOs". This is not a positive trend in terms of market stability, and in fact, it was one of the things that blew up the market in '87 - a failed deal that did not fund was part of what initiated that crash.

If this was just one or two companies (e.g. like the Countrywide rumors) it would be one thing. But its not. Its all over the markets; I've heard rumors about over one hundred LBOs in the last couple of months. Guys, this is an absolutely insane level of activity in this area. While some of it may just be the higher velocity of rumors (e.g. start a rumor on the Internet then short into it with both hands; illegal as hell but nearly impossible to prove and prosecute) a good part of it really is people sniffing around here and there.

This sort of leverage always ends badly. ALWAYS.

Is D-Day today? Probably not. We are likely to see a fairly substantial move downward, but this is the first shoe to fall off the rack - not the one that takes the whole rack over.

If I had to take a guess on the straw that will finally crack sentiment, I would hazard a guess that it will be the dollar - and Bernacke being backed into a corner where he is forced to raise interest rates. That is looking more and more likely - which, of course, means its a contrary indicator as to cause - in other words it'll be something else that is the actual shoe that falls....

If we do get the sort of downdraft I expect I will be doing more nibbling on SDS this morning. Looking at Shanghi, it looks an awful lot like 2000's Nasdaq..... and we know how that turned out.