Zurich, Switzerland.

Global stocks suffered their worst single day of performance on Thursday in almost a year. Investors haven’t seen this sort of decline in months and I reckon many are starting to wonder if the recent fantasy rally is now officially over. At the very least, it’s fair to conclude that we’re in a correction at this point with risk-based assets plunging yesterday.

Suddenly, in the span of just a few days modest losses have been turned into big declines with the MSCI World Index down more than 5%. The S&P 500 Index in the United States now sits 4.6% lower compared to January 1st. Worse, European stocks as defined by the MSCI Europe Index, measured in dollar terms, has been hit hard – down 8.4% due to a combination of falling stock prices and a surging dollar.

As my colleague, Dugald, has astutely pointed out in this column recently, the technical picture for stocks has indeed been rapidly deteriorating since mid-January. And the sellers came to party yesterday with more damage done to major averages as we close in on important long-term support levels.

The usual risk aversion trades worked wonders on Thursday as high quality bonds, the U.S. dollar, the Japanese yen and the VIX all posted strong gains on a bad day.

Gold plunged especially hard, dropping more than 4% and now down a cumulative 12.5% since hitting an all-time high in early December. Oil also got whacked – down more than 4%.

The dollar, of course, has been on a high since late November. But it’s worth noting a few interesting observations about the dollar rally.

I have serious reservations about this rally because if job losses remain high then this assumes the Fed will have to leave interest rates at current levels (zero percent) for a longer period than has been discounted by the market. The dollar is rising because the EUR is in a freefall. Dollar fundamentals remain bearish with the prospect of an uneven recovery weighing on the currency at some point again later this winter or spring. I also don’t see the EUR recovering any time soon. This scenario remains highly positive for gold.

The Canadian dollar has declined under 2% since the beginning of the year – a modest loss considering the damage done to most foreign currencies, including the EUR and the Brazilian real. The pound, though a risky and debt-infested unit, has also declined modestly.

I was also surprised to see benchmark Treasury bonds rally from 3.65% on Wednesday to 3.60% on Thursday. Usually, a big stock market plunge would trigger a bigger T-bond rally. But it didn’t yesterday.

January payrolls are due this morning and I’m sure it’ll be a volatile day. The best-risk adjusted strategies at these levels are managed futures, the U.S. Dollar Index, the VIX, Treasury bonds and reverse-indexing.

This is not the time to assume risk. Markets are now unwinding and I expect at least a 15% correction off our recent highs. The bear market rally since March 2009 is over.