It's Looking a Lot Like a Correction ... or Worse

4 The KBW Bank Index: The financial crisis began as a credit crunch that eviscerated the banking sector. When things are bad in Europe, bank stocks, especially the big European bank stocks, fall most sharply. When things look better, they put in outsized gains.

Tacked on top of this, but frequently overlooked amid the civil unrest in Athens and jitters stemming from the Flash Crash of a couple weeks ago, is the fast-approaching new regulatory environment for the financial system. The Senate last week passed its reform bill and now both houses of Congress will hammer out a final law. The G-20 group of nations is working on global banking reforms.

The KBW Bank Index ― which tracks big banks ― will tell us if those regulations are going to bite very hard or merely sort of hard. A really sharp bite will create one more headwind for the broader market. Given how Germany's unilateral move against short-selling rattled investors last week, we shouldn't overlook how new finance-industry regulations might affect the broader market.

The KBW Bank Index fell 16% in the last month. On Friday, however, it was up nearly 4%. That would be a positive indication in what is still a "fulcrum sector" in the market.
Keep Reading>>