FOR MONTHS NOW

, equities have been an unmitigated train wreck that has dropped the average stock a good 25% from its highs and has left all three major indexes down double digits within the first 64 trading days of the year. In less than a year's time, the credit crisis has metastasized from a pair of highly leveraged

Bear Sterns

So what's working? Within equities markets, not much save for steel, gold and commodity plays. Otherwise there are virtually no equities showing strength at present. With such widespread weakness, one could easily fashion an argument that stocks are oversold and due for a bounce. Still, markets tend not to decline sharply because they're poised to thunder up to new highs. There's been some serious damage done that will take, at minimum, months to rebuild.

Of course, I had no idea that the early weakness in financials first observed last summer would turn into one of the worst credit implosions in modern history. Even now, I wonder if the public at large really comprehends the severity of the drop in financials, whose declines are starting to resemble those of tech stocks post-March 2000. Within the last year, names like IndyMac Bancorp, Countrywide Financial, Citigroup, Washington Mutual and Zions Bancorp have lost between 50% and 95% of their value, just as CMGI, Microsoft, Cisco Systems and JDS Uniphase did between 2000 and 2001.

Indeed, this has been a generational fall for financials. Unlike many speculative Nasdaq or OTC stocks, it's rare to see such a large and widespread amount of market cap evaporate within a relatively short period of time. The early 1990s decline, for example, which saw stocks like Citigroup fall more than 40% from their highs, was relatively short-lived. A year later, most had recovered lost ground.

That Was Then...

Citigroup, J.P. Morgan and Bank of America, 5/15/90 thru 1/1/92

Source: BigCharts.com

...This Is Now

Citigroup, J.P. Morgan and Bank of America, 3/9/07 TO 3/7/08

Source: SmartMoney.com

For the bulls, the fact that the credit markets and weak economy are front-page news is actually a net positive. As I often like to point out, by the time a market story is being covered on the CBS Evening News, the real tradable portion of the move has usually already been made.

But as usual, the best indicator of the market is the market itself. So forget investor confidence or the economic fundamentals. If we are to believe that the decline in financials is over, then, simply put, the stocks need to first stop going down. Thus far, they haven't.

Back in late 2002, I noted that Internet stocks, even in the face of relentless bad news and public scorn, began mounting a sustained bull run. People hated the word dot-com, even as names like Amazon.com, Yahoo and Priceline.com mustered triple-digit recoveries.

That's what I'd like to see: a schism between the emotional herd and objective reality of the market itself. When the market is doing well but the public is relentlessly negative, you know which one I think you should trust.

"Is Fannie Mae Toast? would normally be interpreted as a bullish sign; that is, if the stock itself wasn't so undeniably frail. This past week shares traded at the same level as they did in 1995. So much for the late 1990s and 2003-2007 bull market, eh?

In many ways, the housing collapse has been more devastating than that of the dot-coms. After all, everybody knew Amazon and Yahoo had no reason to be trading at such outrageous valuations. But elevated prices for real estate, especially residential real estate, were somehow interpreted as more sensible and justified than the bubble-ear valuations for CMGI or TheGlobe.com. After all, a home isn't a speculative gamble like eToys or Webvan; it's inseparably woven into the American Dream.

Five years ago it was the Carlton Sheets-types who had us all believing that we too could make a fortune in real estate with no money down. Now we've got a vast array of politicians proposing entitlement-mentality ways of subsidizing those who bought homes they simply couldn't afford and won't be able to under almost any circumstances.

And that's the rub. Way more than the technology bust, the real-estate meltdown has a political risk whose fallout is still at least a year in the making. Politicians, eager to seize upon the public's bloodlust over real-estate losses, have championed the mortgage meltdown as a key election-year issue. Bailouts, rate freezes and other violations of private property are being bandied about by members of both political parties, all of which, not unlike the president's stimulus plan, will only exacerbate an already bad situation.

Add it all up and it would suggest that real estate, banking and related financial sectors still have further to fall.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.