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Friday Look Ahead: Wall Street Goes from Overbought to Deep Correction

In the course of two weeks, stocks have gone from being "overbought" by some measures to being deep in correction mode.

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In fact, in some ways, the correction happened in just a few hours, thanks to some unexplained trades in stocks and futures, and apparent computer glitches. The S&P 500, down 3.2 percent Thursday, has declined 7.3 percent from its recent 19-month high of 1217. But during Thursday's wild afternoon sell off, the S&P was down more than 12 percent from that April 23 high.

Were it not for Thursday's 347-point Dow decline, Friday's markets would have been heavily focused on the widely anticipated April jobs report, released at 8:30 a.m. Economists expect 180,000 non farm payrolls were added in April, and that unemployment holds at 9.7 percent. Now Wall Street is also focused on whether the German parliament approves the Greek aid package early Friday morning.

Thursday's cascading stock market sell off began after European Central Bank President Jean-Claude Trichet failed to give much comfort to markets, already fretting about fears of contagion in Europe and the knock on affect on Europe's banks, big holders of sovereign debt. The selling accelerated in mid afternoon when trading glitches apparently exacerbated the sell off, turning some pricing into a guessing game and, in a harrowing five minutes, taking the Dow below 10,000 in a near 1000 point move.

As stocks sold off, buyers rushed into Treasurys, sending yields lower. The spreads between Treasurys and other credits widened, with a particularly pronounced move in high yield bonds. Traders have been watching a creep up in Libor, the London interbank lending rate, as worries about European banks increased.

"This a reminder that the market is based on confidence and unfortunately confidence is an emotion, and we're in a mercurial world..I don't know how much of the down draft is real. We could come in tomorrow and the whole thing is re-set. I would be a buyer here," said Jack Ablin, chief investment officer at Harris Private Bank.

The euro lost 1.5 percent, taking it to $1.2629. Oil fell along with other commodities, but gold jumped, gaining 1.9 percent to $1196 as some investors bid on it for its quasi currency status.

The financial sector was the worst performer in the stock market, losing 4.1 percent, with consumer discretionary not far behind, down 3.5 percent. Some chain store monthly sales reports were on the soft side, also affecting investor sentiment early in the day.

"It's unusual that you have this much of a move ahead of a jobs report," said Robert Sinche, chief investment strategist at Lily Pond Capital.

"We know when there's positions to be unwound, and no buyers, that's when very extreme outcomes could develop," he said. "The best thing here is take a deep breath. Don't do anything you don't have to. I think reacting at times like this is usually a harmful reaction, rather than a rational reaction."

Sinche said investors are now looking for some reassurance from European leaders. Trichet personally conducted a briefing after the ECB's rates meeting Thursday. The markets were anticipating some type of quantitative easing programs, similar to those used by the Fed to help U.S. banks after the Lehman crisis.

Several hours after Trichet spoke, mobs again descended on the streets of Athens, further unnerving market.

"You can see some of the spreads widening out. Again, this is where the ECB needs to be aggressive and provide leadership and talk about the holy grail of price stability, and I think, in retrospect Trichet has used the line 'we don't rule anything in, we don't rule anything out.' That would have been a better response to some of the questions then to take some of the hard line stands he felt he had to take," said Sinche

"I'm expecting to see them conciliatory tomorrow," he said.

Analysts have said that the solution for Europe may be a restructuring of debt of Greece and its other fiscally weak nations, but that solution is not on the table and would require the banks taking a 'haircut' on the debt.

"I think it's time for the adults to get into the room and take control. It would be a true Greek tragedy for this to unfold to the degree it seems to be," said Robert Albertson of Sandler O'Neill. Traders have said U.S. bank stocks are reacting to fear of the unknown when it comes to Europe's banking institutions.

But Robertson said the U.S. banks are not the worry. "I think we built a bigger wall of capital versus theirs," he said, adding the European banks' "capital structures are less fortress-like than ours."

"I'm not so sure what we should be worrying about is the banks, but the general health of the global economy," he said.

Markets Mayhem

Thursday's trading mess up is the latest black eye for Wall Street, and it will be the target of regulatory investigations. Both the SEC and CFTC say they are looking into what happened in markets Thursday.

Nasdaq and NYSE Arca both canceled some questionable trades. For instance, Procter and Gamble's low price on NYSE was $56 but it traded around $39.37 on the Nasdaq before finishing the day at $60.65. A NYSE official explained that NYSE sometimes 'slows down' its trading because of volume so that it could guarantee the market did not become dislocated. When it 'slows" trading, it posts the bid and ask. On the Nasdaq and other electronic markets, computers match prices.

A number of stocks temporarily lost 100 percent of their value, including Boston Beer and Accenture.

"We're a quantitative firm, and the data we were getting was terrible. I was getting quotes from two different markets that were $10 a part. That's the problem. I'm still sorting out. How much of this is real. How much is illusory. I'm still scratching my head," said Ablin.

What Else to Watch

By late Thursday, it appeared the U.K. Conservative Party was set to win the most seats in Thursday's general election. But it also looked like it would fall short of a parliamentary majority.

On Friday, Goldman Sachs holds its shareholder's meeting at 9:30 a.m. AIG reports earnings ahead of the open. Berkshire Hathaway reports earnings after the close.

Oil Drill

Oil finished the day down 3.6 percent at $77.11, but not before taking a deeper dive to $74.

John Kilduff of Roundearth Capital said the wild move was one he'll always remember.

"I think certainly it shows the commodities and crude oil are linked at the hip to what's going on in the equities market. It's never been more clear. I think it was the culmination of absolute fear of what 's going on in Europe and all the uncertainties around the Greece situation and the riots, and the U.K. election," he said.

"I was in the market in 1987 and went through both Iraq wars. I remember $10 oil and $147 oil, and I'll never forget today," he said.

Questions? Comments? Email us at marketinsider@cnbc.com