Back in May I was telling people that I was looking for a decline into July - then a bounce into August - and another drop into October. At the same time though I had thought gold and commodities would continue higher and bonds would decline along with the dollar. Instead commodities are falling with the rest of the market and the dollar and bonds are rising.

This has surprised me. But I recognize it for what it is - a pure flight for liquidity.

Last August when the market dropped hard we saw the same thing happen. And it happened again for a few days in January and in March too.

The difference though is that during these three times it happened when pure panic entered the market and the market was at or just about to bottom.

That isn't the case now.

This looks like the start of a new leg down for the market and not the end of a decline. Up until now gold stocks and commodities would actually buck the declines of this bear market until the last few days of a decline - then they would drop. But this time they are falling at the start of a market decline. That's a different pattern from what we have seen in the past and I think it means that this corrective way may end up being more frightening then the two previous ones we've seen so far this year.

It appears that hedge funds and institutions are literally running away from everything and diving into bonds and the dollar. No matter that in the long-run those may not be prudent things to invest in, but for now for whatever reason all they care about is cashing out - and their selling is driving every stock sector down.

This is likely to continue until we see this correction come to an end and no end is in sight at the moment - and probably won't be until we see the market go through its July lows - and that has the potential to snowball into a big sell-off.

In a market like this preservation of capital is key. There is nothing wrong with having high cash reserves. Shorting isn't appropriate for everyone, but managing your risk and knowing when you will cut losses is key. You've seen me do once with gold stocks last month and I just did it again last week, unfortunately.

Mike Swanson is Editor, www.wallstreetwindow.com

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