On any day when the indexes are down more than 1.5% or more, bulls are going to suffer some losses. While it may not feel very good, what happened Monday is exactly what this market needed. Technically conditions have become quite stretched and efforts at any sort of corrective action have been consistently rebuffed.

Over and over again, we have heard that the market can't correct due to the flood of liquidity. That has rendered valuation arguments meaningless, but what no one saw coming was the spread of a deadly virus that has effectively shut down the economy in China.

The confluence of extended market conditions and a negative news catalyst is almost perfect and now the question is how deep the correction will go before some solid support is found.

There is still not enough clarity about this virus to enable aggressive buyers to jump in. While the number of deaths and other statistics seems fairly small, there still isn't any idea how much further this will spread. There will be a widespread economic contraction in Asia, even if containment is achieved very quickly, but that will take a couple of weeks at an absolute minimum. The likelihood of more negative headlines is quite high.

While breadth was quite poorMonday with around 1,675 gainers to 5,850 decliners, one interesting aspect of the action is that the small-cap index iShares Russell 2000 Index (IWM) lost just 1.13% compared with over a 2% loss in the Nasdaq 100 (QQQ) . The big caps there were much more extended that the small caps corrected more which is exactly what we would hope to see.

The good news about the action of this sort is that it will eventually lead to some good stock picking. The bulk of small caps report in a week or two and there should be some interesting setups.

Don't forget that earnings reports hit with Apple (AAPL) being the big news on Tuesday night.

Overall this market is acting like a very normal market and it is refreshing to see. It may not cause much celebration, but this is what a healthy market does on a periodic basis and it will lead us to a new crop of opportunities.

Have a great evening. I'll see you tomorrow.

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Original post:

It Doesn't Taste Good, but the Market Finally Swallows its Medicine - TheStreet