As we have pointed out before, the Financials represent 20% of the stocks on the S&P 500, so the Banking Index is very important to watch relative to what will happen on the S&P.

Given the high volatility on the Banking Sector, the VIX (Volatility Index) is now correlating more with the Banking Index than the S&P 500.

Our first chart today, shows the correlation between the $BKX (Banking Index) with the VIX. This is being shown on a 60 minute chart over a 50 day period. (The VIX moves in the opposite direction of the markets.)

Note the white trend lines on the BKX and the VIX below. Both indexes reversed their direction at the same time on November 28th. Since that time, the VIX moved down and the BKX moved up until Tuesday.

At the close on Tuesday, the BKX moved down, and the VIX moved up ... but the VIX is still below its moving averages. This is a divergent relationship, and the divergence should work itself out in the next few days to a condition where both indexes trend in the same direction.

This will be an interesting battle as Goldman Sachs may soon report sub-prime losses well in excess of what they have been reporting ... and at the same time, the Fed has its new Liquidity plan trying to keep things on the positive side. This clash of good news and bad news will test the market's resolve.

Our NYSE New Highs chart is below. When enough stocks are making new highs, the market rallies to the upside. I like to see a New Highs level of at least 100 because that correlates well with up moves.

As you can see below, the New Highs in the past 12 days have moved up, but have remained below the 100 indicator level. At the same time, the S&P has moved up fairly strongly. The up move is more aggressive than it should have been given the low levels of New Highs. This suggests that the S&P got a little ahead of itself which fits with the weaker action we have seen in the past two days.