If the market always speaks a message, then Wednesday's 800-point tumble in the Dow Industrials and 3.3 percent break in the S&P 500 can be considered the market shouting for attention.
But what is it saying, and how can investors separate the signals from the noise?
Let's first note that Wednesday's message, dramatic as it was, was not really a new one, but an accelerated version of market action that's been evident for weeks. As noted here and everywhere since mid-summer, an unusually large number of stocks have been lagging the rally in the headline indexes. The small-cap Russell 2000 was already down 7 percent from its high even as the S&P 500 held near a record. Housing, auto, airline and semiconductor stocks – to name a few groups – were in steep downturns.
So the big one-day drop was essentially the large-stock benchmarks succumbing to the pressure that had already cheapened the majority of stocks.
This can be viewed as a positive, because by Wednesday's close the market looks a good deal more "oversold" and washed out than was the case at the start of the January-February correction, which came with most stocks stretched far to the upside.
So the morning damage assessment shows many of the usual prerequisites for a market bounce in place: Strategist Tony Dwyer of Canaccord Genuity – who has been bullish but expecting volatility and waiting for a better tactical entry point – notes that only one-sixth of S&P 500 stocks finished above their 10-day moving average and just 23 percent of index members are above their 50-day average. That fits with the idea of a comprehensive rout in the majority of stocks, which can present lower-risk rebound opportunities. Note that these readings were much more extreme near the low in February – which makes sense because the total index losses were about twice as large then.