Bulls Circle the Wagons

Other subprime participants fell in concert. Countrywide Financial's(CFC Quote) fell 4.9% as Lehman Brothers downgraded the stock. Accredited Home Lenders(LEND Quote) fell 26%.

Not All Change Is Good

The subprime lenders' collapse is not new news, says Margie Patel, portfolio strategist at Pioneer Investments.

"Absent fundamental data, you can't move the ball down the field," says Patel, on a day the market had a decent, though less-than-expected, ISM report of activity in the services sector to turn to for relative strength.

Indeed, the still-prevailing sentiment about this market correction is that nothing "fundamental" has changed.

That's not exactly true. Lending standards have tightened as the subprime mortgage boom continues to go bust. That's fundamental, but not necessarily economically back-breaking. According to the Federal Reserve's January senior loan officer survey, lending standards for mortgage credit has gotten to the tightest levels since the early 1990s.

But the credit retrenchment can't be a full-blown crunch until it bleeds into credit cards or other consumer-oriented credit products. This hasn't happened yet, but the direction of the trend is not promising.

Thus far, delinquencies in both subprime and prime mortgages are still close to recent cyclical lows, according to Torsten Slok, economist at Deutsche Bank. Foreclosures are within their recent range, and credit card and consumer loans are still not feeling the pinch of tighter lending standards, he writes. In sum, Slok says the subprime sector alone can't hurt the economy too much as these borrowers represent less than 0.1% of consumer spending.