A surprise rejection of the $700 billion Fed bailout package by U.S. Congress yesterday triggered the worst one-day drop the S&P 500 has seen since the Crash of 1987. After moving sharply lower in the first thirty minutes of trading, stocks traded in a tight, sideways range until just after mid-day. With a little more than two hours remaining, the major indices swiftly began free-falling to new lows after the negative vote by the U.S. House of Representatives. Suffering its second-worst loss ever, the S&P 500 plunged 8.8%. Only the 20.5% drop of Black Monday, on October 19, 1987, exceeded that loss. The Nasdaq Composite careened to a loss of 9.1%, its third-worst historical decline. Only Black Monday and April 14, 2000, when the "dot com" bubble began popping, exceeded yesterday's loss. The Dow Jones Industrial Average fell 7.0%, as the small-cap Russell 2000 and S&P Midcap 400 indices tumbled 6.7% and 7.3% respectively. Stocks began bouncing off their lows thirty minutes before the closing bell, but a final wave of selling in the concluding minutes of trading caused the main stock market indexes to settle at their worst levels of the day.

Not surprisingly, turnover raced higher across the board. Total volume in the NYSE exceeded the previous day's level by 41%, while volume in the Nasdaq surged 60% higher. Although volume moved back above 50-day average levels, it's interesting to note that turnover in both exchanges was actually greater every day from September 16 - 19 of this year. Considering the degree of yesterday's blowout, one might have expected a more frenzied pace of trading, but that wasn't the case. Nevertheless, market internals were the worst I personally recall seeing in my ten-year history of trading. In the NYSE, declining volume blew away advancing volume by a incredible margin of 79 to 1! There were 3,125 declining issues, but just 154 advancing issues.

Going into yesterday, we said the various commodity ETFs were about the only group with bullish chart patterns. But despite typically having a low correlation to the direction of the main stock market indexes, most of the commodity ETFs also got whacked yesterday. DB Commodity Index Fund (DBC), a good proxy for the group, lost 6.2%. U.S. Oil Fund (USO), which was forming a "bull flag" pattern prior to yesterday, gapped down to open near support of its 10-day moving average, prompting us to buy with a good reward/risk ratio. However, it immediately headed south and hit our protective stop, completely ignoring last week's bullish consolidation. By day's end, USO had nosedived 10.6%, though we fortunately bailed out several points earlier. Although the U.S. dollar showed strength yesterday, Spot Gold was the one excepting commodity that also rallied. SPDR Gold Trust (GLD), a defensive play, rallied 3.4%. It is also one of the few commodity ETFs still holding last week's bullish consolidation.

As stocks were getting killed yesterday, I couldn't help but chuckle at the recent restrictions on short selling. Sold to the general public as a way to protect them from those "evil short sellers" who profit at the peril of others, the short selling ban obviously did nothing to save the market yesterday. Think the losses might have been greater if not for the short selling ban? I think the opposite, as less shorts in the market means less nervous bears who will take profits and cover their positions, thereby helping to spark a rally. It also means lower odds for an eventual "short squeeze," a high-momentum upward thrust driven by short sellers who are forced to simultaneously close their positions. "Short squeezes" often help weak markets to form important bottoms. As I mentioned last week, messing with the natural ebb and flow of our free market system of supply and demand is not only useless, but quite dangerous.

As painful as yesterday's losses may have been for investors and traders who expected bullish follow-through from last Friday's session, the good news is that the selling won't last forever. In fact, the faster and more violently stocks correct, the sooner the inevitable bottom will form, and the greater the initial bounce will be. Though we've been mostly in cash throughout this month, our occasional attempts to catch a new trend have been met with violent reversals, regardless of how good the setup looked. Still, we're not concerned, as losing months are simply part of the business. The model trading account of The Wagner Daily is still showing a profitable quarter, and even more profitable year -- regardless of a 24% year-to-date drop in the S&P 500. Even better is that we'll be more than ready to capture large gains from the eventual market bottom. In the short-term, there's not much to say or do until Congress comes to a final conclusion on the rescue package, hopefully sometime this week.

Open ETF positions:

Long - (none)
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.