By Chip Hanlon

Yesterday, as unpleasant as it was, was quite necessary and helpful. Odd sounding, I know, but to reach a low after the summer we've experienced we need to reach a final, fear-based capitulation, something I also discussed in a video interview here yesterday. It's also exactly what I was getting at last Thursday when I said "If returns in recent weeks haven't been enough to send stock market investors into panic mode, then we probably need a big, down 500 day in the market to get us there."

Unfortunately, yesterday's 504-point decline actually wasn't quite enough from a sentiment perspective. A put/call ratio of 1.47 by itself is great and the NASDAQ Composite is reaching more extreme short-term oversold levels. But a VIX bounce to just 31.7, on the other hand, is more representative of most sentiment gauges, which aren't signaling outright fear and most major market indices aren't quite washed out, either.

We probably need at least one more huge down day to wash us out and set up for the next advance but I don't think we're going to get it, and here's why: the Fed.

No Chance the Fed Won't Cut

Pardon the double negative above but as I type, Fed Funds futures are predicting a 90% likelihood that the Fed will cut rates today-- up from 66% yesterday-- with some odds of a larger cut and no chance they'll stand pat.

Moves like this out of Washington have been precisely the problem over the last 12 months; every time we get a cut from the Fed, legislation from Congress or a "bailout" from Treasury, it provides false hope to the stock market, preventing it from getting fully oversold.

Think about it: have these interest rate cuts or bailouts done anything to change economic reality, save Wall Street or prevent home prices from heading lower? Of course not.

Such "assistance" has merely prolonged the misery in the stock market and prevented market-clearing prices from happening, all while putting taxpayers more and more at risk.

Vince Farrell was just on CNBC saying he thought the Fed should cut rates, but was fearful it would not. In this case, I'm in precise disagreement with our friend; I wish they would refrain from pushing on the rate-cutting string for many reasons (starting with the dollar), but it looks like a certainty Bernanke and company will lower rates today.

That would be a shame. For the long-term health of the market, we need stocks to head down from here, not up.