OVERBOUGHT FINANCIALS LEAD MARKET LOWER --AIG, CITIGROUP, AND BANK OF AMERICA ARE BIG LOSERS -- VIX BREAKS OUT TO UPSIDE AS STOCKS FALL -- TREASURIES, THE YEN, AND THE DOLLAR ARE ATTRACTING SAFE HAVEN MONEY

FINANCIALS DROP 4%... I recently wrote about the negative warning from the market's loss of leadership in the technology sector. Today, the negative warning is coming from financials. And it's coming at a bad time for the financials the rest of the market. The Financials Sector SPDR (XLF) is down 4% in early afternoon trading (versus 2% for the S&P 500). On a day when all market sectors are in the red, financials are the biggest losers. That includes banks, brokers, and insurance companies. Chart 1 also shows the recent XLF advance to be on shaky technical ground. For one thing, the 14-day RSI (top of chart) has formed a negative divergence on the lastest move to new high ground (red arrow). The MACD lines (bottom of chart) are turning down after forming a negative divergence of their own (circle). [I showed similar negative patterns in the Nasdaq and S&P 500 yesterday]. The fact that the July/August advance took place in five waves also adds to the likelihood of a downside correction. Initial downside support resides at the mid-August low near 13.62. If that's broken, the XLF could retrace most or all of its July/August rally.

Chart 1

BIGGEST FINANCIAL SELLERS... Three of the most influential financial stocks shown below are having a bad day. Their losses range from -17% (AIG), -7% (Citigroup), and -5% (Bank of America). All are reacting from overbought readings and appear ripe for correction. Their rising relative strength lines show that they've been market leaders during the summer rally. The market can't afford to lose that financial leadership. It looks like September may live up to its reputation as a weak month.

Chart 2

Chart 3

Chart 4

VIX TURNS UP ... Another warning sign for stocks is today's upside breakout in the CBOE Volatility (VIX) Index. I've been warning that a close over its August peak at 28.39 would turn its short-term trend higher. A rising VIX usually means falling stocks. Chart 5 shows the VIX trading over its August high in afternoon trading. Stocks and commodities are having another bad day. Defensive money is continuing to move into Treasuries and the yen. The U.S. Dollar is also starting to attract some safe haven money. More on that later.

Chart 5