After opening near unchanged levels yesterday, the major indices quickly entered into a steady downtrend that persisted throughout the entire session. By the closing bell, each of the main stock market indexes had fallen at least 2%, giving back all their gains of the past two days. Still, considering how far stocks bounced off their mid-July low, in such a short period of time, yesterday's correction was not really that terrible. The Nasdaq Composite shed 2.0%, the S&P 500 2.3%, and the Dow Jones Industrial Average 2.4%. The small-cap Russell 2000 fell 2.3%, as the S&P Midcap 400 tumbled 3.0%. All the broad-based indexes settled at their lowest levels of the day.

Lessening the blow of yesterday's sell-off was the fact that volume ticked lower across the board. Total volume in both the NYSE and Nasdaq receded 7% below the previous day's levels. This tells us that the bearish price action was more the result of an overall lack of buying interest, rather than heavy selling into strength on the part of institutions. As such, the price to volume relationship of the broad market remains positive. Following up three days of higher volume gains ("accumulation") with a session of lighter volume losses is bullish, regardless of yesterday's substantial losses. If, however, the market continues to retrace while turnover picks up, it will serve as a warning signal that the rally attempt off the mid-July lows may be in danger. Although stocks dropped on lighter volume, firmly negative market internals were a concern. In the NYSE, declining volume exceeded advancing volume by a margin of nearly 7 to 1. The Nasdaq adv/dec ratio was negative by more than 4 to 1.

After scanning the charts of hundred ETFs, looking for low-risk buying opportunities after the pullback, we frankly were not impressed. Most industry sectors have bounced off their lows, but have resistance of their 20 and 50-day moving averages overhead. Furthermore, many remain well within the trend channels of their primary downtrends that have been in place for months. Ultra short-term traders may benefit from trading the momentum of counter-trend bounces, but yesterday's sharp pullback proves the necessity of being physically and mentally able to get out quickly when pressure of the dominant downtrends resumes. As for short selling, we are seeing a lot of relative weakness in the Basic Materials sector, which has completely ignored the rally within the U.S. markets over the past two weeks. As such, it's not surprising that the sector fell sharply lower yesterday, alongside of the broad market. When a sector is so weak that it can't even rally with the broad market, it is generally one of the first sectors to fall apart as soon as the broad market corrects. If you're looking to take advantage of a bearish play right now, consider selling short the Basic Materials sector.