Within a period of three weeks, we have wiped out all the year to date gains in the Canadian stock market. Officially putting us in bear market territory. At least if you believe in the 10% rule as the official demarcation line between bull and bear markets. And all of this, because of sub-prime lending fears.

Invariably, fear drives us to make wrong decisions at exactly the wrong time. Something we are witnessing first hand as traders en-masse head for the exits. In what can only be described as roller coaster carnage.

The problem is that investors are throwing the proverbial baby out with the bath water. Companies that have nothing to do with the subprime mess are getting caught up in the same panic selling, in a classic technical example of all boats falling with the tide.

I see this as a buying opportunity. You should too! Especially among financial institutions, which I believe will be front and center when this market recovers.

The central banks are saying, and more importantly, doing the right thing. They are all adding liquidity to the system. So are the major financial institutions.

For example, note the announcement today from a consortium of major pension funds to float the interest rate on short term paper. These are short term investment grade corporate notes that typically have terms less than one year. Since we are in the middle of a liquidity crisis, there is no one willing to step up to the plate to buy this so-called good quality paper.

That market will come back, so the major players (this consortium controls 70% of this market) have decided to keep the paper, rather than trying to roll it over. Rolling occurs when the institution sells maturing paper to finance the purchase of new short term notes. Being able to “float” the interest rate eliminates the need to roll it over.

At the same time, these institutions have encouraged the rating agencies – who attended the same meeting - to keep the credit quality investment grade. In time, these institutions believe, as do I, that the market will recover. Probably supported by lower rates from the world central banks. In short, the major players see this as a short term phenomena, despite the fear that is currently gripping individual traders.

If they are right, the markets will settle, and eventually, that will inspire confidence among investors, as to the attractiveness of the Canadian banks. Obviously this will not occur overnight. But with banks now yielding between 3.5% and 4%, you get paid well while you wait. The Bank of Montreal is particularly attractive from a cash flow perspective, with a dividend yield of 4.4%.

Covered call writing, as I talked about last week, looks extremely attractive. As does cash secured put writing. In fact, with prices at current levels, you might look at writing September or October puts on Canadian banks, using at-the-money options. Again, with the intention of buying – should the puts be assigned - at bargain basement prices.

I think of that as rescuing the baby from the bath water.