After weeks of better-than-expected economic news and earnings reports, all it took was one disappointing U.S. retail sales report to send investors scurrying for cover on Wednesday.

Major stock market indexes fell sharply, stretching their losing streak to three days and raising questions about the sustainability of the remarkable rally over the past two months, which saw U.S. stocks rise as much as 39 per cent from their 12-year lows in early March and sent Canadian stock into positive territory for 2009.

The Dow Jones industrial average closed at 8284.89, down 184.22 points or 2.2 per cent. The broader S&P 500 closed at 883.92, down 24.43 points or 2.7 per cent. In Canada, the S&P/TSX composite index closed at 9709.51, down 368.19 points or 3.7 per cent.

"It's a very nervous market," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto. "It takes a long time to build up confidence but it doesn't take much to [take it away]"

Wednesday's confidence buster: U.S. retail sales fell 0.4 per cent in April from March, an unexpected decline that spelled trouble to many investors. Consumer spending represents about 70 per cent of U.S. economic activity, so if shopping malls are quiet amid rising unemployment, then the anticipated economic recovery could be delayed.

The disappointing report wouldn't have meant much if it had arrived at the depths of despair earlier this year, when it was feared that the global economy was in freefall. But with recent upbeat glimpses of employment, manufacturing activity, corporate earnings and consumer confidence, the report stands out as a reason to think twice about this budding optimism.

"For the rebound to continue, the market needs economic data to strengthen the position that the economy is bottoming," said Tommy Nguyen, portfolio manager at Palos Management in Montreal, pointing to the fact that most of the earnings news for the first quarter has already been digested.

Without positive economic data - such as better-than-expecting readings on U.S. home prices or consumer confidence - he believes that the S&P 500 could fall back in line with its average over the past 50 days. That would take the index to about 821, or nearly 12 per cent below its high on Friday.

He believes that nervous investors who have seen stocks soar over the past two months were looking for any reason to take money off the table, and Wednesday's disappointing retail sales report provided the perfect opportunity to make a run for it.

Stocks that had pulled away from the pack were cut down, which helps explain why Canadian stocks suffered a nasty drubbing.

High-flying sectors such as energy and materials had surged 48 per cent and 74 per cent, respectively, from their lows, making them particularly vulnerable to a selloff. Among some of the standouts, Teck Resources Ltd. had risen 385 per cent from its low but fell 16.2 per cent on Wednesday. Suncor Energy Inc. had nearly doubled from its low and then sank 5.1 per cent.

At the same time, Ben Silverman, director of research at InsiderScore.com, a firm that monitors the buying and selling of shares by corporate insiders, pointed out that insiders have been enthusiastic sellers over the past couple of weeks - a bearish sign given that these same folks were buying stocks when indexes were at their lows.

As well, the number of companies with insider selling over the past week was at its second highest level in the past year. More specifically, insider selling within the retail industry rose significantly in late April, providing an interesting correlation with the disappointing report on retail sales for that month.

The stock market selloff at least had one feature that could inspire the belief that the dip could be short lived: Volume of shares traded was relatively light in the case of the S&P 500, with 1.36 billion shares trading hands versus a 50-day moving average of more than 1.4 billion shares.