How's that stock market treating ya?

Check out that volume down (the bottom portion of the graph that spikes when the price collapsed). A fall on high volume is not a good thing.

The market is way overdue for a correction (correction = 10% down). This is reminiscent of the fall during the internet boom. At that time, everyone was saying what they are saying now which is that this is a "short term" phenomena .... a "correction" ... not the beginnings of a bear market. And most of the "experts" I read say the same thing, people I trust. But you never know whether it's a brief roller-coaster ride or the bubble popping. The economic news is getting ugly with housing looking, well, like "some of us" thought it was looking ... horrible. Fourth quarter GDP looks like the revision is going to stink. Unkie Al came out yesterday and said a recession was due. All in all, a little reality is suddenly sinking in to the market.

The danger in this is a couple of things. First, if big traders step in and start buying this "bottom" and it's not, that's going to clobber sentiment and could prolong any downturn. Right now CNBC is trotting out all the "pros" who are acting all calm and suggesting this is a good "buying opportunity". One guy says, "stocks are certainly a lot cheaper today than yesterday and a good buying opportunity".

Ah huh.

Second, credit has been so loose, and so many people have borrowed to buy stocks, that a haircut like today can cause a lot of problems for traders, and large institutions who rush to cover their shorts. Finally, highly leveraged institutions (those who have borrowed a lot of money to buy stuff like companies with the companies as collateral) could face a squeeze that could cause collapses. Most of these deals are predicated on stock value and we all know what happens if that craps out.

The next few days should be very interesting to watch. I personally got out of the stock market (except for some commodity stocks) when the S&P at around 1335. If the market shows stability below a 10% correction, I might dip my toe back in. Until then, no way.

Update: Barry Ritholtz:

Me? I prefer to believe what is right before my eyes: Decaying economic fundamentals, a complacent market that is overbought and way overdue for a correction. Add to that the single biggest positive contributor to the economy over the past 4 years – Housing – showing no signs of being anywhere near a bottom. A few more jiggles on the screen, and we there will be significant technical deterioration.

Update II: The term for trying to buy the market when it's doing what it's doing is "catching a falling knife". Looks like a lot of people are getting cut.