We can forget about Monday. The S&P 500 opened the week with its biggest daily percentage gain since the Depression, but on Wednesday it had its biggest fall since Black Monday in October 1987. Monday's gains have gone.

This sell-off was different from the uniform sell-offs that came before it; this time the S&P 500 oil and materials indices fell 15.5 and 12.1 per cent for the day, far worse than the 9 per cent fall in the S&P. The bursting of the oil bubble is now a critical factor driving stocks lower.

West Texas Intermediate crude fell to a new low for the year of $73.60 per barrel, 50.1 per cent down since its peak exactly three months ago. The trade from which many hedge funds profited in the first year of the credit crisis of going long oil, while shorting banks, would have lost 55.5 per cent in those past three months.

Over this period, the S&P financials index is down only 9.4 per cent, but energy stocks are down 42.2 per cent. The burst oil bubble triggered problems for hedge funds, which spilled over into forced sales of equities.

While at one point oil and the stock market appeared inversely related, they are now trading almost perfectly in alignment. Bad news on the economy is reason to sell both.

And bad economic news was plentiful on Wednesday. Most startlingly, US retail sales fell for the third month in a row. For the first time in 17 years, real US consumption contracted in the past quarter.

Meanwhile, the drastic moves to unfreeze the money markets have not achieved enough to lift the gloom.

The spread of the three-month Libor interbank rate over the Fed Funds rate, a key measure of distrust between banks, has dropped only from 3.25 to 3.04 percentage points. Last year, this spread was stable at 0.13 percentage points. And the typical 30-year US mortgage rate is back above 6 per cent, bringing risks of more damage to house prices and consumers.