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Based on feedback from a variety of sources, there may be some margin calls getting in the way of our well-ordered rally. Tuesday was a repeat of Monday: up early, then selling into the close on higher volume.

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When margin selling commences, the most liquid assets go out the door first -- that includes stocks, bonds and some speculative commodities like gold and oil. This also puts pressure on short-term interest rates, as investors facing margin calls need some dough. Pressure has pushed the 13-week T-Bill from 4.35% to 4.73% in the last 7 days.

The bad feelings I got last Wednesday when the market first dropped due to the flimsiest of reasons were no doubt more the result of evolving subprime troubles.

The SEC has launched 12 investigations into this area. It's sort of like a 12-step program for them. First step, define a subprime mortgage; step two, define a CDO; step three, order lunch -- and so forth.

D Fry Market Outlook 27 06 2007PIMCO's Bill often-wrong-seldom-in-doubt Gross has repeated his call that the Fed will have to cut interest rates in the next six months due to the subprime problem. He may be late, since markets may need the rate cut Thursday. The Treasury and the Fed were busy injecting more money to primary dealers.

What does it all mean? If the subprime issue becomes large, the authorities will no doubt choose to "monetize" the problem away by printing money and dropping it from helicopters and/or cut interest rates. This would be inflationary ultimately. But 'ultimately' is not a concern generally for politicians and authorities since the latter will chant 'inflation is contained' from every rooftop.

I'm already exhausted, but let's press on!!!!

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There's so much more news to unfold throughout the week, posting a lot of charts is going to prove a waste of time. Barring some further subprime fallout, most eyes will be focused on energy inventories tomorrow, the Fed meeting Thursday, and personal income data Friday.

For now we need to sit tight.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: S&P 500 Index (NYSEARCA:SPY) and United States Oil Fund ETF (NYSEARCA:USO).

Source: David Fry's Market Outlook for Wednesday