Whether you believe the proposed financial “bailout” plan was an appropriate response or an unnecessary government intrusion, it’s clear the market wasn’t pleased by the failure of the bill to pass the House of Representatives. After all, politicians have just spent the past week telling us the dire economic consequences of a “no” vote, so it’s hardly surprising the market got spooked. Yesterday’s selloff was the largest percentage drop for the broader averages since the 1987 stock market crash.

But there are no final words in politics. Asian markets were remarkably stable overnight, and European markets are flat to slightly higher. US markets also opened higher. I suspect this is a reaction to rhetoric out of Congress that some form of the bill will be brought back to the floor for a vote as early as Thursday.

My guess is that Congressional leaders on both sides of the aisle will lean on fence-sitting members over the next few days and strong-arm them into passing some sort of bailout bill. After all, a total of just 218 votes are required for passage–the count yesterday was 205–so they only need 13 more votes to push the bill through. Yesterday’s dramatic drop in the market, highlighted by President Bush this morning, might well be enough to give some members cover to vote for the legislation. This is just politics, plain and simple.

As I’ll explain in more depth in tomorrow’s issue of The Energy Strategist, the stock market is currently much like a coiled spring. Panic and fear levels are running high; in fact, the S&P Volatility Index (VIX), a measure of fear in the S&P options market, closed yesterday at 46.72, above the levels seen just after the September 2001 terrorist attacks.

When fear levels are running this high and panic rules Wall Street, it’s not time to sell stocks; it’s time to look for opportunity. Historically, the moments of greatest fear have also offered the biggest opportunities. For example investors who purchased the Philadelphia Oil Services Index (OSX) on the close of the day the market opened after 9/11 (not the ultimate bottom), saw a 50 percent gain by the following May.

Many of my favorite stocks in the energy sector have been hit hard in recent weeks. I continue to believe the selling has very little to do with fundamentals and a great deal to do with market sentiment and funds’ urgent need to raise cash at any cost.

Valuations have become increasingly stretched to the downside; as I pointed out in the most recent issue of The Energy Strategist, many stocks I cover are trading at the cheapest valuation since 2001-02, a major buying opportunity for the group.

Fear on Wall Street is totally overshadowing some extraordinarily bullish developments for both oil and natural gas. Gasoline inventories in the US currently sit at the lowest level since 1967; the chart I posted to the blog At These Levels yesterday is truly scary. Inventories are so low, in fact, that stations in parts of the country are literally running out of gas to sell. These shortages could last into mid-October. Crude oil inventories are healthier but still below average.

Meanwhile, non-OPEC (Organization of the Petroleum Exporting Countries) oil production continues to disappoint. This year’s growth in non-OPEC production is likely to total less than 300,000 barrels per day compared to expectations for more than 1 million barrels per day late in 2007. It’s increasingly clear to me that the only thing that saved the world from $200-per-barrel oil this year was a big fall in US oil demand over the summer months. Given weak production growth and strong developing world demand, this is likely to be a temporary reprieve at best.

Then there’s natural gas. It’s been a long time since I heard so much bearish commentary about a market; you’d think that we’re facing a glut of gas in storage heading into the winter heating season instead of inventories roughly at average levels and well below year-ago totals. As I’ll explain in tomorrow’s issue, the bearishness is way overdone and gas-levered stocks are likely to perform well through year-end.

The financial crisis is totally overshadowing these factors. However, I suspect that the passage of a bill later on this week will allay fears of an outright global economic collapse and financial meltdown. Once that fear is removed, the market will once again focus on the bullish underlying fundamentals.

When you couple those factors with normal seasonal strength in the fourth quarter, you have the recipe for a major snap-back rally. When I say major, I mean that many of the stocks that have been hit in recent weeks could rally 50 to 80 percent between now and early 2009. Some more leveraged names might manage triple-digit gains.

My advice remains to focus on the seven recommendations and three hedge plays I outlined in the “Fresh Money Buy Table” in the last issue of The Energy Strategist. These are my highest confidence picks, and although they’ve been dragged lower with the rest of the market, I see these stocks having strong recoveries in the context of a fourth quarter rally. All represent outstanding values at current depressed prices.

I know that one of these picks, Weatherford International (NYSE: WFT), has touched my recommended stop. This is due solely to near unprecedented market volatility and doesn’t reflect the fundamentals of the stock; I’m recommending all subscribers reenter the stock. Given the recent volatility, I’m also revising and widening my stops on all 10 picks to prevent stop-outs due to simple market noise.

If a bill is passed and I see confirmation that a recovery and relief rally is underway, I’ll look to get more aggressive with other energy-oriented stocks. We’ve been stopped out of several portfolio holdings in recent weeks, some for profits and others for losses. Most of these names are now trading well under those stop levels but continue to look fundamentally attractive; these will be the first stocks I gravitate to in a year-end rally.