BANK INDEX HITS NEW YEARLY LOW -- DROP IN EXXON MAY BE ENERGY WARNING -- MARKET DROP ON BIG VOLUME PUTS RALLY IN JEOPARDY

BEAR MARKET IN BANKS ... Earlier today I showed the Bank Index on the verge of hitting a new low for the year. By day's end, it had fallen to the lowest level in two years (Chart 1). The puts the BKX on track to challenge its 2005 low. In case you're wondering what that means, the BKX has fallen more than 20% from its early 2007 peak. That qualifies as an official bear market in bank stocks. That 5% daily drop helped make financials the day's weakest group. Consumer discretionary stocks came in second worst. Other large losers were small caps and transports. Those are the same market groups that have been lagging behind the rest of the market since mid-year. Although all sectors lost ground, groups that held up a bit better than the rest of market were healthcare, energy, industrials, utilities, and consumer staples. Bonds also had a strong day.

Chart 1

EXXON DROP MAY BE ENERGY WARNING... A 4% drop in Exxon Mobil pushed the stock below initial chart support at 90 and its 50-day moving average. It fell on heavy volume. Its relative strength line is also starting to slip. That's enough to turn its short-term trend lower and trigger a short-term sell signal. Although the energy group held up better, the fact that XOM is the biggest stock in the oil patch makes its breakdown worth nothing. Chart 3 shows the Energy SPDR (XLE) falling -2.5% today after some early gains. Its daily MACD lines are in negative territory as well. Keep an eye on the mid-October intra-day low at 72.67. A close below that previous support level would justify some energy profit-taking, and might put even more pressure on stocks.

Chart 2

Chart 3

DOW BREAKS 50-DAY LINE... The market had one of its worst days since the recent rally began in mid-August. The Dow fell 362 points (-2.60%), and it did so on heavy volume. Market breadth was decidedly negative. Big board losers beat gainers by a six to one margin. The Dow ended back below its 50-day moving average which threatens its recent low at 13407. That puts the two-month uptrend in some jeopardy (especially if the October low is broken). For a more in-depth explanation of recent rotations into bonds and other defensive groups, please see my Market Message posted earlier today. Recent market activity is consistent with a stock market that's preparing for an economic slowdown.

Chart 4

FRIDAY EVENING TV INTERVIEW ... I'll be the guest of Paul Kangas on the Nightly Business Report which airs at 6:30 pm (NYT) tomorrow (Friday) evening. We should be talking about the same things you're reading here, but at least you're getting it in advance and in its entirety. Unfortunately, TV interviews don't always provide the opportunity to get the big picture straight. That's why I don't do that many of them. NBR is an exception and, in my view, is the best business show on TV.