Investors are terrified ... and they're overreacting

CNNMoney's 2016 Playbook: Stocks

Investors are really spooked. We're talking "The Exorcist" type of scared. Cover your eyes. And don't have pea soup for lunch.

Stocks plunged again Friday after China's market tanked and oil dipped below $30 again.

And CNNMoney's Fear & Greed Index, a gauge of seven market sentiment indicators that has been in Extreme Fear territory all week, briefly fell into the single digits Friday.

It hasn't been below 10 since late August -- the last time investors were panicking about China. The Fear & Greed Index can only go as low as zero. (The horror. The horror.)

Related: Dow dives again as China, oil fears grip markets

But if you want to get a real sense of the level of fear right now, just look at the bond market.

The 10-year Treasury -- typically a safe haven in tumultuous times -- is on fire.

The yield on the 10-year dipped below 2% early Friday morning for the first time since mid-October. Bond yields fall when investors are buying bonds. And they have been buying a lot of them so far this year.

The 10-year yield was 2.27% (paging Jackée Harry!) at the start of 2016.

And two exchange-traded funds that track long-term government bonds, the iShares 7-10 Year Treasury Bond ETF (IEF) and iShares 20+ Year Treasury Bond ETF (TLT), are up 2% and 4% this year while the Dow and S&P 500 are down 8%.

It's particularly odd that bonds are doing so well when you consider that the Federal Reserve just raised interest rates last month for the first time in more than nine years ... and hinted that it could hike rates four more times in 2016.

Related: All-American stocks won't save you from global turmoil

Bond yields usually climb along with interest rates. Well guess what? The market doesn't believe the Fed.

According to Fed funds futures on the Chicago Mercantile Exchange, investors are now pricing in just an 8% chance of a rate hike this month and only 34% likelihood in March.

Other signs of the fear currently gripping Wall Street? Gold, which often rallies in times of broader market tumult, rallied Friday and is up 3% this year.

But some money managers said that this sell-off is getting a little out of hand -- and that this is the worst time for investors to be freaking out.

"I had one client calling me with a little bit of fear in his voice because of the Royal Bank of Scotland report to sell everything," said Ted Parrish, who runs the investment firm Parrish Capital.

Related: RBS warns that 2016 will be a 'cataclysmic' year

"So I asked him if he thinks Apple, GE and CVS are all going to be around in five years. He said yes. So I said to him why sell? What's the point of doing that if you're a long-term investor?" Parrish added.

Parrish said the current market correction, like many others throughout history, should be the time to buy.

To that end, Parrish said he's recently scooped up shares of beaten down stocks such as sneaker maker Skechers (SKX), organic food company Hain Celestial (HAIN), drug firm GlaxoSmithKline (GSK) as well as American Express (AXP).

Looking for bargains is good advice. Maybe investors will eventually listen to it. For now, it looks like they are too scared to dip their toes back into stocks just yet and are sticking with bonds, gold and cash.

It would be a mistake to do that for too long.

"In markets like this the temptation is always to raise more cash, but you have to think soberly," said John Norris, managing director and head of wealth management at Oakworth Capital Bank.

He added though that many of his clients are calling him to ask about when it's a good time to buy.

"I don't see anything in the tea leaves to suggest that 2016 is going be like another 2008. You have to wonder what's going on," Norris said. "The world is not about to end."

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