After weeks of directionless price action and numerous "headfakes" in both directions, the broad market finally made a decisive break out of its sideways trading ranges. Unfortunately for the bulls, the direction of the break was to the downside. After gapping down on the open, stocks trended steadily lower throughout the entire day. Aided by bearish momentum caused when the major indices broke key technical levels of support, each of the main stock market indexes suffered whopping losses of approximately 3%. The tech-dominant Nasdaq Composite and small-cap Russell 2000 indices registered identical losses of 3.2%, as the benchmark S&P 500 and blue-chip Dow Jones Industrial Average sustained matching declines of 3.0%. The S&P Midcap 400 shed 2.4%. After a feeble bounce in the final ninety minutes of trading fizzled out, all the major indices closed at their dead lows of the day.

Significantly higher turnover accompanied yesterday's carnage, causing both the S&P 500 and Nasdaq Composite to sustain another bearish "distribution day." Total volume in the NYSE increased 7% above the previous day's level, while volume in the Nasdaq rose 13%. Volume in both exchanges moved back above 50-day average levels for the first time in four weeks, as mutual funds, hedge funds, and other institutions rushed for the exit doors. In yesterday's commentary, we said, "The Nasdaq has now registered four days of higher volume losses in recent weeks. Typically, the presence of more than three such days of institutional selling is enough to trigger a wave of downward momentum. In mid-May of 2008, the Nasdaq suffered four 'distribution days' over a short period that eventually triggered the June - July sell-off." Interestingly, yesterday's plunge immediately followed the fourth day of higher volume losses in the Nasdaq. Volume is not only a leading indicator, but it's also one of the few indicators that never lies. That's why we carefully analyze the stock market's price to volume relationship on a daily basis.

As one might easily surmise, yesterday's bearish price action was an important turning point for the near and intermediate-term direction of the overall stock market. Due to nearly a month of erratic, sloppy price action in the major indices, we had been maintaining a minimal number of ETF positions. Despite buying a few ETFs with relative strength, and selling short a few with relative weakness, positions in recent weeks quickly stopped out due to a lack of overall trend in the market. But while yesterday's sell-off may have been bad news for traditional "buy and hold" investors, we're pleased the stock market appears to have made up its mind as to which direction it wanted to go. As we kept saying last week, we indeed finally saw the real direction of the market, just a few days after the Labor Day holiday had passed.