The market held up pretty well until 30 minutes before the close, when a wave of selling in financial shares brought all three major indices into red. But the losses were quite limited. For example, S&P500, the worst performer among the three, was down by less than 1% after gaining more than 3% yesterday. The volume was on the light side. Similar to yesterday, there was little economic news scheduled to be released. As we mentioned yesterday, financials are the key to watch in this environment and it is very obvious to see why that’s the case in today’s trading (a comparison graph between the financial ETF and the S&P500 Index was shown below).



The market opened the day relatively flat. After some initial profit taking, which sent the major indices briefly into negative territory, financials led the market higher. One can see from the intra-day comparison between financials and S&P500 that both peaked at exactly the same time. And each time there was a plunge in the financial sector, the broad market would follow pretty quickly. So why would financial start to lose steam after a pretty positive start in the morning? Part of the answer can be found in the treasury market (below is a graph comparing the financial ETF and the 10-year Treasury note yield). Apparently, bond traders were not convinced that yesterday’s Fed announcement would be enough to rescue the mortgage security market. In fact, the odds of a 75bps cut in the Fed’s next meeting jumped back to 70%+ area. The US dollar also hit a new historical low against the Euro as a result.