Despite strong earnings from Wal-Mart (NYSE:WMT), the focus Thursday was again on Europe and Spain’s banks. And there were renewed fears of an outright default by Greece following leftist comments that if Europe cut off funding, the country would “repudiate its debts.”

At mid-morning, selling accelerated after the Philly Fed reported that business conditions in the mid-Atlantic region contracted this month. And at the same time, the leading indicators were reported as contracting, as well.

At the close, the DJIA was off 156 points to 12,442, the S&P 500 fell 20 to 1,305 and the Nasdaq was down 60 points to close at 2,814. Volume increased with the selling as the NYSE traded 944 million shares and the Nasdaq crossed 530 million. Decliners were ahead of advancers by 6-to-1 on the NYSE and by 4-to-1 on the Nasdaq.

For the first time since the decline began just 16 days ago, we are seeing signs of excessive fear, and our internal and sentiment indicators are deeply oversold. An outright cry of a pending selloff from no less than a well-known hedge fund manager was quoted in The Wall Street Journal yesterday indicating that even the “smart money” is scared. The CBOE Volatility Index was up almost 8% yesterday, and the American Association of Individual Investors is “moving toward a level of bearishness usually associated with market lows, but has some ways to go yet,” said Sy Harding of Streetsmart.com. Both the VIX and AAII are contra-indicators, i.e., high fear numbers = pending bottoms.

Both of the leading indices, the Dow-30 (DJIA) and Nasdaq, have confirmed breakdowns — from the May high for the Nasdaq and the March high for the Dow. But both are approaching the significant support zone created from October to January. It is from that level that the first meaningful bounce should occur, and the Relative Strength Index is confirming that we are getting close to oversold levels not seen since August 2011.

Conclusion: With all of our internal indicators grossly oversold and sentiment indicators confirming, traders should be cautious in adding to new bearish positions except on rallies. A sharp decline today could be a good opportunity for short sellers to cash in. And long-term buyers might get an opportunity to take small positions in quality stocks that have fallen sharply to prices that reflect a solid value.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.