The pattern of somewhat surprising strength on Friday followed by more dramatic weakness the next session reasserted itself Monday. Unfulfilled expectations of Osama bin Laden's capture, the rising possibility of a U.S.-led war against Iraq without U.N. support, another missile test by North Korea, and some company-specific concerns conspired to further help push major equity proxies around the world sharply lower Monday.

As discussed

here, what's happening is short-sellers worried about a "good news" event cover their positions heading into the weekend, giving the market a boost on Friday. Barring positive developments, they retake a bearish stance on Monday, helping push stocks down.

The

Dow Jones Industrial Average

fell 2.2% to 7568.18, the

S&P 500

shed 2.6% to 807.48 and the

Nasdaq Composite

lost 2.1% to 1278.40. Those declines followed steep losses in international bourses that sent major averages in Germany, France and the U.K. to multiyear lows while Japan's Nikkei hit another 20-year low.

By international standards, major U.S. averages are doing relatively well, as they remain above their October lows, although a retest seems inevitable. On Oct. 9, the Dow closed at 7286.27 and the S&P 500 near 777. The Dow traded as low as 7197 and the S&P as low as 768.67 intraday on Oct. 10. The Comp traded as low as 1108.49 last October and closed as low as 1114.11.

Trading volume remained subdued, although some participants were buoyed by the fact declining stocks led advancers by 3 to 1 and nearly 92% of the 1.2 billion shares on the

Big Board

were to the downside. However, such "analysis" obscures the facts about the study of 90% downside days by Paul Desmond of Lowry's Reports. To

reiterate, the 90% downside days Desmond studied focused on sessions in which

both

volume and price action were 90% negative. Because compiling the latter is time-consuming, Lowry's usually won't make a determination about whether a session qualifies until the next day.

More importantly, Desmond's work showed that bottoms don't occur until there's a series of such "90% downside" days, at least five at major market bottoms. Any excitement about Monday being a 90% downside day is premature, at best, and again suggests some participants' eagerness to spy a "bottom," even as it appears the bottom is about to fall out.

Of course, it's entirely possible the market could experience a technically driven, "oversold bounce" in the coming days. But "despite the big drop

Monday, panic is still far too strong a word for the type of moves we are seeing in stocks," as Union Tree Capital's Scott Reamer commented in

RealMoney.com's

Columnist Conversation.

Panic being a prerequisite for a sustainable bottom, according to the folks at Lowry's.

Bully for Bonds, Bad for the Buck

The global flight from equities provided a boon to "safe haven" investments. The yield on the two-year Treasury fell to 1.32%, its lowest level since 1954, while the benchmark 10-year note's yield fell to an all-time low of 3.56% as its price rose 22/32 to 102 20/32. Gold futures rose 1.1% to $354.80 per ounce.

The dollar followed the path of equities, however. The Dollar Index fell 0.28 to 97.26.

Both the greenback and stocks were hit by the same concerns, including the latest developments in the long-running prelude to war with Iraq. The prospect of war "is rapidly increasing," Secretary of State Colin Powell said over the weekend. Concurrently, U.S. officials are trying to shore up support for a second United Nations resolution approving the use of force. Powell also said the U.S. was within "striking distance" of winning the nine votes necessary for passage in the Security Council, assuming no vetoes by its permanent members.

However, evidence of additional weapons violations by Saddam Hussein's regime, as reported in

The New York Times

, apparently failed to sway world opinion. Russia pledged to vote against such a resolution on Monday and France reiterated its opposition, although neither explicitly threatened to veto. Elsewhere, Pakistan said it would abstain and U.N. Secretary General Kofi Annan said the legitimacy of action against Iraq would be "seriously impaired" without the Security Council's authorization.

In Great Britain, Prime Minister Tony Blair faces an uprising among some of his own cabinet members if the U.K. supports a war on Iraq without U.N. backing.

On a more positive development for U.S. interests, Turkey's ruling party chief Tayyip Erdogan won Sunday's by-election. Thus, he will assume the role of prime minister, clearing the way for a possible second vote by Turkey's parliament on whether to allow U.S. troops to mobilize on Turkish soil.

Further complicating an already complicated world, North Korea test-fired a long range missile into the Sea of Japan for the second time in two weeks. Nearly lost in the geopolitical shuffle was a report in

Time

magazine that Iran is closer to producing uranium than previously thought.

Something Else to Worry About

As if all that weren't enough, traders also had to contend with a revival of concern about

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

.

"Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy," St. Louis Fed President William Poole Poole said in a

speech. "Because of the scale of the short-term obligations of the GSEs, a market crisis could become acute in a matter of days, or even hours."

Poole stressed that securities issued by Fannie and Freddie are not backed by the U.S. government, as opposed to Ginnie Mae's, and recommended legislation that clarifies these relationships, or lack thereof. He also said Fannie and Freddie are undercapitalized.

In a statement attributed to senior vice president Chuck Greener, Fannie Mae took umbrage with Poole's conclusions: "There is no other company in America with more stringent requirements to ensure its safety and soundness," Greener said, citing a review by Nobel Laureate economist Joseph Stiglitz, who dubbed the risk of a Fannie Mae default "effectively zero."

Nevertheless, following

last week's warnings about derivatives by Warren Buffett, Poole's stark comments revived concern about systemic risk and the GSEs' huge role in the financial firmament. The fact Poole referenced the "failure or near failure of Penn-Central, Continental-Illinois, Long-Term Capital Management, Enron and WorldCom," as well as the S&L crises and the 1987 crash, did nothing to soothe Wall Street's already frayed nerves.

Shares of Fannie Mae fell 6.6% and Freddie Mac lost 5.8%.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.