Just when it looked like the market had turned a corner, the bears once again seized control. Oil had a little bit to do with the sell-off but the financial sector was once again the center of attention.

The financial sector got off to a good start although market sentiment wasn’t all that great. There was some news over the weekend that a few more regional banks were shut down which brings the number to seven (and counting). The selling intensified in the afternoon session when the Treasury Secretary spoke.

When the dust settled, the Dow finished the session 239 points lower to 11,131. The 2% drop was paced by the financial sector which ended the session down 4.5%. The Nasdaq also lost 2%, or 46 points, and closed at 2,264. The S&P 500 took a 23 point hit and finished the day at 1,234.

Merrill Lynch (MER,$24.33, down $3.19) is on its way back down after spending most of last week above $30. The selling in Merrill started on Friday when the stock lost $1.50 and continued yesterday. There was no “big” news during the trading session but after the bell Merrill said it plans to raise $8.5 billion by selling new common stock. Hmmm. Reminds me of the Lehman Brothers Holdings (LEH, $15.27, down $1.78) debacle. Lehman sold $4 billion of common stock priced at $28 back in June and you see where its share price is.

In Merrill’s case, Singapore’s Temasek Holdings has already agreed to buy $3.4 billion of the new shares. Gee, imagine that. What is unbelievable is the fact that institutions, foreign companies, investors, hedge funds, or whoever is putting so much money into these inflated of deflated stocks. The knuckleheads who bought Lehman are looking at nearly a 50% loss and Vegas may soon be taking bets on where Merrill is eventually headed.

The fact that the financial sector is so volatile right now is great for us. I profiled some Merrill Lynch July 32.50 puts at the end of June when Merrill was on the way down. The puts went from $2.15 to $7.00 a few weeks later and we were eventually stopped out. But not before we booked 200%+ gains. Then the financial sector started to rally and we bought four different call options on four different companies, held them for a week, made money and were stopped out. The gains weren’t as big as the Merrill put option trade but many of you made 50% or more.

The point is, and although it is tricky, we can keep playing the same trends over and over. Sure, we will have to make some adjustments but the price swings are allowing us enough time to go both long and short and the market is giving us plenty of clues on which way the pendulum is swinging.

Here’s how the other stocks we continue to watch ended on Monday:

Citigroup (C, $17.43, down $1.42)
Wachovia (WB, $13.63, down $0.87)
Goldman Sachs (GS, $172.90, down $5.76)
Fannie Mae (FNM, $10.31, down $1.24)
Freddie Mac (FRE, $7.72, down $0.55)

We could be getting close to another bottom for these stocks which may provide another chance to go long. However, the financial sector could also be setting up for another major move to the downside.

Rick Rouse