Over the past two days, we've been suggesting a very cautious stance in the market until we saw whether or not the gains from the initial positive reaction to Monday's Fannie/Freddie news could be sustained. Just one day later, we seem to have already gotten our answer. Stocks opened near the flat line, but the bears quickly resumed control, sending the broad market into a steady downtrend that persisted throughout the entire session. By the closing bell, all the major indices had given back their previous day's gains, and a quite a bit more. The S&P 500 plunged 3.4%, the Nasdaq Composite 2.6%, and the Dow Jones Industrial Average 2.4%. Small and mid-cap stocks suffered the worst. The Russell 2000 tumbled 3.5% and the S&P Midcap 400 nosedived 3.9%. All the main stock market indexes closed at their dead lows of the day.

Total volume in the NYSE eased 2% from Monday's swift pace, while volume in the Nasdaq was on par with the previous day's level. Turnover remained well above average levels, pointing to the presence of institutional selling yesterday. Market internals were atrocious, as broad selling was noted in every major industry sector. In the NYSE, declining volume trounced advancing volume by a margin of 9 to 1. The Nasdaq adv/dec volume ratio was negative by an astonishing spread of 13 to 1. With such bearish market internals, there was nowhere for bulls to run and hide yesterday.

In yesterday's commentary, we expressed suspicion over the narrow breadth of Monday's news-inspired rally. Although both the S&P 500 and Dow Jones Industrial Average gained more than 2% that day, advancing volume in the NYSE was only nominally higher than declining volume. Because the rally was largely focused on the financial-related sectors, we said, "Our overall assessment is that it was nothing more than a sector-specific bear market rally." As such, we were not surprised that stocks moved lower yesterday; however, we didn't necessarily expect a sell-off of such magnitude to follow just one day later.

Fortunately, we avoided getting sucked into the excitement of Monday morning's knee-jerk rally that followed news of the U.S. government's seizure of Fannie Mae and Freddie Mac. With such massive amounts of overhead supply to contend with, we felt it would be difficult for the main stock market indexes to sustain Monday's initial gains without a period of price consolidation. Nevertheless, we also weren't keen on taking new short positions, as stocks had jumped back into their choppy, sideways ranges that challenged traders throughout much of August. Though we've intentionally avoided new positions so far this week, our only open ETF position, which we bought last week, is now looking great.