Stocks Nosedive Into the Close, Sink More Than 2.5%

Bearish action in commodities, and a dramatic selloff in oil, were also contributing to a selloff in the energy sector, said Mendelsohn.

Crude oil slumped $3.12 to settle at $43.67 a barrel. Gold was unchanged at $765.50 an ounce. The Energy Select Sector SPDR (XLE Quote), which tracks energy stocks, fell 6.9% to $43.26.

"It's relentless. It's all over the place," said Windham's Mendelsohn of the selling. He said that a failure by gold to rally on weakness in the dollar indicates that hedge-fund liquidation was probably adding to the volatility.

Phil Flynn, vice president and energy analyst at Alaron Trading, said that previous growth in demand for oil had been fueled by cheap credit. "With the global slowdown and the unavailability of credit, it's going to be very difficult to maintain those price levels," he said. "Don't be surprised to see $35 a barrel. ... We could be in a new era of lower energy prices for years to come."

He said that after investors realized that the developing world's growth was not insulated from credit troubles among developed countries, "We've gone from running out of oil to having an oil glut. We have more oil than we know what to do with." Flynn said there will eventually be another boom cycle for oil, but it's years away.

Investors were also concerned about holding long positions in advance of Friday's jobs report from the Department of Labor, said Windham's Mendelsohn.

There were plenty of reminders that the number could be ugly; layoffs and salary reductions dominated the day's early headlines. Executives at Citigroup (C Quote), along with director and senior adviser Robert Rubin, were willing to go without bonuses this year, according to a report by the Financial Times. Shares dropped 5.4% to $7.40.