Market takes a parabolic pounding

Can’t sugar coat today....it was downright ugly.

The good

1) The VIX found some religion

2) Big down days via gap down tend to have a high chance of getting filled in the not too distant future.

3) Another 2%+ drop like today and we will reach maximum oversold levels (not including the once in the lifetime oversold reading recorded in the October 2008 crash)

4) In about 1 weeks time sentiment indicators such as AAII will likely give strong buy signals if the market stays around current levels or is lower.

5) The market is oversold enough on an IT basis to stage a big rebound and downside should be limited from here.

The bad

1) A market that gets pounded like today, breaking to a new low and closes at the low of the day signals there's more work to be done on the downside. At the very least it suggests a few days of base building would be required before any bottom would be in.

2) The put/call ratio although high today at 1.06 didn't get as high as 1.15+ which is what we saw at the July and November lows.

3) Rydex traders are dragging their feet somewhat towards the exits. They are reducing their bullish exposure and increasing bearish exposure but they aren't rushing to do so as they usually did right near the bottom.

4) The VIX likely needs to go even higher i.e. high twenties to low 30s. VIX 26 March options are showing a 15% premium for puts. A 40% premium or higher is likely what's needed to mark a top in the VIX and hence bottom in the market.

The bottom line is that although fear took a big jump today it still may not be high enough to mark the bottom but the bottom is likely not too far away from here. I would guess 2.5% maximum downside remains. The market is quite compressed here with only 10% of stocks in the SPX trading above their 20 DMA. That makes it very dangerous to be short. In addition, only 22% of stocks in the SPX are trading above their 50 DMA which suggests we are in position to make an IT low. Even during both of the brutal bear markets of the prior decade; such readings often indicated an IT bottom was imminent. Everything seems to be lining up for a bottom to made sometime very soon....I'm thinking next week. I'll take it one day at a time though.

My best guess for tomorrow is that markets close either up or flattish no matter what the news is regarding the payroll numbers simply due to the compressed oversold condition.

Obviously the market is worried about something whether it's China tightening, PIGS problems, Obama's restrictions on banks you name it. There has always been something to worry about in the past 11 months; however, you tend to see the market respond to such worries in a meaningful way when there is a lack of a ST "wall of worry". I believe the long term wall of worry is still solid as granite but the ST wall of worry had been shaky since late November. By ST wall of worry I'm referring to traders. i.e. option traders, rydex traders and such. The ST wall of worry is now getting repaired quite quickly although I don't think it's completely solid just yet. But in about 1 weeks time I think it will be....we'll see