Wham! That's why can't turn your back on the market... even for just a day. Unless you're truly in stocks for the long haul (as in multi-year holding periods), days like Thursday can turn a decent month for stocks into a frustrating one. You know what though? While today's decimation was ugly, I don't know that I'd say the sellers pushed stocks past their tipping point. In fact, one of the best things the bulls have going for them today is the sheer size of the plunge. Say what? I think I've mentioned this to you before, but if not, here's the Q&D version - big moves invite big reversals. Were the market to lose 0.3% a day for a month straight, nobody would ever get the urge to go bargain hunting, fearing they'd be catching a falling knife. When the market plunges more than a full percentage point in one day, however, fear can turn to greed overnight, and the buyers could be digging in as early as tomorrow. For proof that it happens, you only have to go back to the January 13th plunge, which was reversed (and then some) beginning on the 14th. Take a look. With all of that being said, there are a couple of things that are radically different about today's selloff compared to the one from the 13th, and it's those differences that scares me. One of those differences is the fact that the VIX jumped today, hurdling its upper Bollinger band for a while. We didn't see this happen in mid-January, which ultimately meant the market was shrugging off that dip. Today's selloff, though, isn't being brushed off. The VIX's spike says traders are truly afraid here, and while most market bottoms coincide with a VIX spike, this is a case where the VIX could continue to rise until it meets a more meaningful ceiling... and the S&P 500 could drift higher the whole time. Another big red flag today is the way the Dow Jones Industrial Average finally broke under its big floor at 16,256. You may recall that was the low the Dow made back on the 13th, and was also where the index's lower Bollinger band was/is this week. Yeah, well, it's no longer a floor. This is also the first time the Dow Jones Industrial Average has been beneath the lower Bollinger band - to this magnitude - since June. Yes, we saw the Dow fall under the lower Bollinger band in August, but not like this. In August, the selloff gently pushed the lower band line in a downward direction. Though it was bearish, it was controlled. There was nothing controlled about today's break under the key support level though. The Dow's plunge just obliterated the potential floor today. And the NASDAQ? You might recall the NASDAQ Composite has been the market's brightest star of late, doling out bullish progress even when most other indices were losing ground. Well, even the composite was under fire today. It's not the NASDAQ itself that has me worried with what's going on with the chart below, though. It's the NASDAQ's Volatility Index, the VXN. Like the S&P 500's VIX, the VXN is rising quite firmly now, yet still has lots of room to keep rising before hitting a likely ceiling. The VXN didn't stop rallying in October, for instance, until it reached the 22.0 area. If a retest of the 22.0 mark is in the cards for the VXN, that's a ton of time and room for the NASDAQ Composite to break down. Yes, the VXN peeled back from its high after touching its upper Bollinger band line, but it still closed above its key short-term moving averages for the first time in a while today. It all looks more than a little troubling on the surface. Yet, I'm still not ready to say stocks are in a freefall that will give us a long-overdue correction. For starters, yes, I'm going to keep my dead-cat-bounce theory on the table. The size of Thursday's drop already has some value-seekers licking their chops, and their buying may bring a quick end to today's weakness. That buy-in may be a short-lived one, but it'll at least be an opportunity to let the bulls regroup and rekindle the rally. The dead-cat-bounce isn't the biggest reason I'm not yet turning into a bear, however. What I'm waiting on to turn fully bearish is the S&P 500's break under the 1817 area. That's roughly where the S&P 500's 50-day moving average line (purple) as well as the lower 20-day Bollinger band (blue) are converging, and seeing as how both have been support levels (and reversal points) for the S&P 500 of late, I think the prudent thing for you, me, and anyone else to do at this point is to wait for more certain signs of the market's true undertow. See, I still see a chance of the S&P 500 popping back above 1849, renewing the rally for possibly a few more weeks. Worried you might miss the trade-worthy part of any downside move? I get that, but honestly, I wouldn't worry about it. The S&P 500 will only need to fall about another 0.7% to break under its floor around 1817. That's a pittance compared to the 7% to 8% pullback that could be in the making here. I'll sacrifice one percentage point to be confident about the other seven or so percentage points I could end up reaping a big reward on. Oh, and one last thought about today's selloff ....while the media deemed a weak manufacturing report from China and disappointing earnings reports as the reason, I'm calling BS on the cause/effect relationship. Today's dip played out because traders - who have been nervous for a while - finally lost their will to hang onto stocks today. Just for the record, the Chinese manufacturing data in question was the HSBC Purchasing Manager's Index for the country. Last month's reading of 49.6 was the lowest it's been since July. Problem: July's lower reading not only didn't spook investors here or abroad, the market actually rallied despite the troubling news then. So, why is it an issue now? (The answer is "perception and perspective", but that's a chat we'll have to save for another time.) As for earnings shortfalls spooking the market, we're not buying that either. As of this morning, 102 of the S&P 500's companies had reported last quarter's results, and a fairly typical 63% of them have managed to top estimates. It was alarming outlooks accompanying those reports that scared investors, who chose to see the glass as half empty rather than half full. Again, however, it's more of a perception issue than a well-reasoned risk-versus-reward issue. You know what though? It doesn't matter. In fact, in my experience we all have more to fear from investors who are becoming bearishly hysterical than we do from a market that's blatantly overvalued. That's why the rising VIX and rising VXN worry me so much now. See, traders who are thinking bearishly tend to act and trade bearishly, which means stocks are vulnerable here. OK, enough rambling for now. There's one piece of trading business we need to get out of the way before signing off. Portfolio Update No need to mice words - let's exit the Silicon Image (SIMG) position. You may recall the last mental stop we placed for SIMG was at $5.80, about 5% above our December 17th entry price of $5.40. Well guys (and gals), Silicon Image broke under $5.80 today. Let's cut bait. I'm 100% sure the weakness we're seeing from Silicon Image is market related and not company driven, but it doesn't matter - a falling stock is a falling stock, and we don't want to sit on a falling stock. It's just a matter of discipline. The exit of SIMG leaves us with Fred's (FRED), MicroSemi (MSCC), and Digital River (DRIV). It's not many trades, but all three picks are holding up pretty well in this horrible market environment. For those of you who are interested, Digital River will be announcing earnings and hosting a conference call on February 5th. I still haven't decided if we're going to hold DRIV through the news. If the market's not looking any healthier by then though, I'm inclined to sell it before the big day.... even if the company has a long history of earnings beats. Microsemi will be announcing its Q4 results after the close today, so there's a good chance those numbers will be out by the time you read this. I mulled letting go of MSCC before its proverbial D-Day, but no guts, no glory, right? I really like the company, and I've got a feeling Microsemi is going to surprise us, in a good way. Alright, that's more than enough for one day. Let's check in again tomorrow to see if we got that dead-cat-bounce, or if Thursday's drubbing was the beginning of big trouble.