Where Should Buyers Come Back In?

Wall Street despair. Where should buyers come into the market?

If you're a stock trader, this previously simple question has now become hideously complex, almost unknowable. That is the source of the despair on Wall Street tonight.

The TARP plan that was rejected by the House of Representatives today was important for a simple reason: it would help put a floor under the credit market.

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  • Spreads in the credit market are now again widening on virtually everything except Treasuries and gold.

    To be a buyer of stocks, but particularly a valuation buyer, you use earnings and interest rates to value stocks.

    The problem: both earnings and interest rates have become moving targets. Right now, the ranges for earnings and interest rates are so wide no real valuation methodology is possible.

    Think about it: you can't predict what Altria is going to earn if you have no idea what it will cost them to borrow money.

    Even the Procter and Gamble's of the world need to borrow money.

    And some players—energy trading companies, investment banks—depend on short-term financing that is virtually inaccessible right now.

    Some small and midcap companies could be wiped out unless the credit markets unfreeze.

    So what do stock traders do? Normally, with the CBOE Volatility Index (VIX) near 50, it's a screaming buy. These were levels that were last seen at the 2002 lows.

    Some bold traders, noting that overseas markets look to be opening down big, say a big down open (another 500 + points on the Dow), could be a tradeable bottom, because at the point you would have a 12 percent correction in two days.

    New from CNBC.com:

    - The Dow 30 at a Glance


    The markets don't go down like that in two days. But even that is now called into question.

    Lowry, the oldest technical analysis service in the United States, said in a note to clients after the bell that while nearly 98 percent of the volume at the NYSE today went to stocks on the downside, ""90% Down Days are frequently followed by 2-7 days of rally, the lack of signs of a major market low suggests any rally, if it occurs, should be used for building additional defensive positions."

    Questions? Comments? tradertalk@cnbc.com