By now most investors should be quite light on common stocks. The market shows no signs of bottoming with each blow-off decline just another in a series of lows.

The recent up-crash on October 13 following the big market collapse on October 9 was unimpressive. There was barely any follow-through the next day. The stock market continues to decline and this morning’s opening looks like another tumultuous session with S&P 500 futures down more than 60 points or 6.6%.

So far in this seminal month of October, the S&P 500 Index has plunged 26.6% -- the worst month on record since the 1930s. Prior to this month, the stock market had not declined more than 17% in a single month since August 1998. That summer the forces of deflation pressured global markets as the Asian economic crisis combined with hedge fund failure Long Term Capital Management pummeled the broader market by 17%. Stocks later recovered in October to finish the year with a 28.5% gain. That won’t happen in 2008.

The CBOE VIX Index is now completely off the charts. This gauge of market volatility has skyrocketed 72% this month, an extreme level that suggests major investor capitulation lies ahead. The big sellers are definitely coming out today and, hopefully, this will mark an intermittent end to the sell-off. I’ll be further encouraged if today’s market action is accompanied by high trading volume.

The VIX is now discounting a financial armageddon.

The stock market is becoming highly attractive and so are the numerous facets of distressed credit markets, including convertibles, preferreds, municipal bonds, investment-grade corporates, TIPs and even bombed-out high yield bonds that now pay yields north of 16%. Everything has been smashed hard this month. The values are enormous, even from a bear’s perspective.

On Tuesday, I purchased municipal bonds, convertible bonds and investment-grade corporate bonds. These are small investments and I plan on bottom-fishing some more. My stock market allocations are slightly net short or my exposure to the market remains negative. If we crash again today and into Monday with big losses, I’ll probably reduce my exposure to neutral or even net long. This selling panic is way overdone with many companies already discounting a recession or worse. My managed accounts this year are down between 6.5% and 8% -- my first calendar year loss managing money since 1992.

For the short-term anyway, I’m encouraged by LIBOR’s decline over the past seven days and the performance of investment-grade debt markets this week. The credit markets are gradually normalizing after weeks of stress and that’s bullish. Weaker credits should still be avoided, including high-yield and emerging market bonds.

At the very least I now expect a major short-term or intermittent bottom to occur for stocks.

If we finish today with a huge loss followed by another crash or mini-crash on Monday and Tuesday, I’d reckon the big sellers will be done with their wholesale liquidation. This pertains especially to the hedge funds, which are closing out positions to raise cash ahead of month-end redemptions on October 31. Many hedge funds are losing big money this year and redemptions are badly eroding capital in the worst attrition of values for the industry since 1998. Estimates show hedge funds down 17% in 2008.

It looks like trading will be halted at the opening…get ready, this will be another wild day.

See you on Monday. Have a good weekend.