Falling Down Again

As long predicted, the correction in oversold stocks appears to be underway.

Tuesday's swoon has been dramatic, coming after a report showing U.S. manufacturing in August returned to expansion for the first time in more than a year-and-a-half.

But it's not enough for the equity market, which some hedge fund managers believe has become overly bullish.

"I am shorting this market because we are facing a period of disappointing economic and corporate growth," said Doug Kass, founder of Seabreeze Partners Management.

More than 80 percent of stocks traded on the New York Stock Exchange are above their 50-day moving average, according to Bespoke Investment Group, and the Investors Intelligence survey, a weekly look at sentiment among newsletter writers, shows the widest gap between bulls and bears since the beginning of 2008.

"People in the market—traders, advisers and individual investors—went from extremely bearish to quite optimistic," said Robert Prechter, founder and president of research company Elliot Wave International in Gainesville, Georgia.

That's not surprising after a 50 percent move upward in the S&P 500 index from 12-year lows in early March. There is a growing belief that the market has outpaced economic realities, and investors are getting skittish.

Gosh, given our continued lousy economy, people are only now starting to question the 50% jump in stocks over the last six months? Watch what happens over the next month folks, it's not going to be pretty.