Yesterday morning, stocks opened modestly higher, sold off, and then traded at the mean point for the remainder of the day. The only sector to show strength was the banks, which rebounded despite a pending investigation into the banking system scheduled for early next year.

The KBW Bank Index rose 2.9% and is up 10% this month. Regional banks did best with BB&T Corporation (NYSE: BBT) up 3.5%, Lincoln National Corporation (NYSE: LNC) up 7.5%, Fifth Third Bancorp (NASDAQ: FITB) gaining 6.5%, and PNC Financial Services (NYSE: PNC) rising 4%.

The Dow Industrials’ gain was led by Bank of America Corporation (NYSE: BAC), up 3.7%, and JPMorgan Chase & Co. (NYSE: JPM), which rose 2.85%. McDonald’s Corporation (NYSE: MCD) was the worst performer on the Dow, falling 2% despite reporting global comparable sales growth of 4.8% for November. One analyst attributed the selling in MCD to expectations among analysts that are unreasonably high.

In corporate news, The Home Depot, Inc. (NYSE: HD) rose following the company’s increasing its expected 2010 earnings and sales growth. Safeway Inc. (NYSE: SWY) gained following a successful stock buyback program of $1 billion. And Fortune Brands, Inc. (NYSE: FO) gained 1% after saying that it would split itself into three businesses and spin off its home and security business, as well as its golf division.

The U.S. dollar rose for the third consecutive day following a jump in the yield of Treasury bonds. The U.S. Dollar Index (DXY), which measures the performance of the dollar against a basket of currencies, rose to 79.985, up from 79.973 on Tuesday. The euro was quoted at $1.3268 versus $1.3259 on Tuesday. Treasury yields jumped with the 10-year benchmark now at 3.33%, the highest yield since June.

At the close, the Dow Jones Industrial Average rose 13 points to 11,372, the S&P 500 gained 5 points to 1,228, and the Nasdaq rose 11 points at 2,609. The NYSE traded 1.1 billion shares with decliners ahead of advances by 1.5 to 1. On the Nasdaq, advancers and decliners were even on volume of 470 million shares.

Crude oil for January delivery fell 41 cents to $90.98 a barrel following a government report that stockpiles of fuel inventories rose by a larger-than-expected amount last week. The Energy Select Sector SPDR (NYSE: XLE) fell 25 cents to $65.79. February gold fell $25.80 to $1,383.20 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) lost 4.73 points at 220.25.

What the Markets Are Saying

Tuesday’s twin “key reversal days” (Dow Industrials and NYSE Composite) are being treated as a non-event by some technicians who point out that the Nasdaq and the S&P 500 closed slightly higher. 

First, let’s define a key reversal day: It is a day when a stock or index hits a high during the day but closes lower.  It usually occurs after a spike in prices and higher volume than on preceding days. According to Martin Pring, who wrote “Technical Analysis Explained,” key reversals are one-day price patterns that usually indicate a short-term trend reversal.

The definition of this type of reversal varies slightly among technicians, but virtually all agree that the reversal day is characterized by high volume. And Tuesday’s volume totaled 1.6 billion shares, which is the highest volume since options expiration day on Nov. 19. The water is somewhat muddied by the higher closes of the other major indices, but I often rely on the NYSE Composite as a guide, and its price pattern on Tuesday meets the qualifications.

And Investors Intelligence agrees that Tuesday’s price action was “a bad sign as volume increased sharply on both exchanges.” II also said, “Overall action suggested large institutions are not participating in the rallies with new buying but are instead selling into any new advance.”

I would add that the rally that led to the reversal resulted from an already discounted news item — the agreement (which may now founder) between the White House and Republicans. In general, news items have a short-term impact on stock prices, so the rally, which was based almost entirely on the agreement, is likely to fail.

As for our internal indicators: All have turned down with the stochastic just a day or two short of issuing a sell signal, while momentum and MACD remain overbought. We’ll consider the sentiment numbers tomorrow. And we will also consider the recent selling in precious metals. Put some cash aside for a great upcoming buying opportunity in that sector.

For one ETF to buy now, see the Trade of the Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.