For months, we had pointed out the very large, two year negative divergence that the Financials had relative to the S&P 500. As discussed, the importance of this was that the Financial Sector represented 14% of the S&P's component structure.

And yet, the S&P went up for two years while the Financials went down for two years. We had commented that when conditions get too far out of sync, equilibrium is always re-established ... it is only a matter of time. See today's chart below ...

So, why are we bringing this topic up today?

It is because Governmental actions may have a self-destruction wish. Let me explain ...

Institutional Investors were starting to panic yesterday. They realize how bad the banking system is and how difficult it is for them to make a profit when interest rates are very low. (The Banking Index's two year drop could be suggesting that a more serious problem is around the corner .. see the chart below.)

So, our government should respect this potentially destructive state of Banking weakness, and NOT inject any new stress elements into the Banking arena. But, instead of that happening, Institutional Investors were starting to panic yesterday because the government appeared ready to do the opposite.

How so? Apparently, the U.S. Federal Housing Finance Agency has been planning to sue the nation's largest banks for approximately 30 Billion Dollars. The idea is to recoup money for Fannie Mae and Freddie Mac. Such a protracted legal event could easily overhang in the banks and markets for two plus years.

If in one's wildest dream, the FHA could find the WORSE timing for such a thing ... this would be it. But, sometimes a personal bias interferes with clear thinking with a disregard for the best long term solution.

Could it be ... that the FHA is looking at this as a possible funding source for the much discussed "underwater mortgage program"? We are referring to the refinancing program being discussed that would help homeowners who owe more on their home than the house is currently worth.

Take a moment to look at today's chart, and you will see the precarious position that the Banking index is still in.

It is possible ... that if the FHA does launch a lawsuit, that the Banking Index will have another leg down and that would have serious repercussions on the stock market. The FHA has until the end of the day on Tuesday to file a lawsuit ... so keep an alert eye out for what happens.