A funny thing happened on the way to one of the greatest bull markets in history. The financial sector, whose miraculous recovery from near-death made it all possible, has lapsed into a coma.

At their highwater mark last week, stocks as measured by the S&P 500 were up 64.1% in 253 days, the best performance since 1933, only equaled two other times in the recorded history of U.S. stock prices. The financial sector has led the way, and has turned in an even more amazing performance. At the S&P 500 Financials sector's highwater mark, it was up 160% in just 222 days.

Now here's what worries me. For the last month, while stocks overall have moved on to new highs, the financial sector hasn't. In fact as of Nov. 24, it was off 6.7% from the highs it made in mid-October. Over the same period, stocks overall are up 1.2%.

The question is: from a technical standpoint, can stocks keep rising when the engine of growth that has powered this whole bull market has sputtered out? From a more fundamental standpoint, the question is: what's gone wrong in the financial sector, and does a problem here pose a threat to overall economic recovery?

The technical question can potentially be answered in an upbeat way. There's nothing wrong with a little sector rotation. In fact it's healthy to see different sectors take the lead at different points in a bull market. It's like a relay race in which one runner rests after passing the baton to the next runner.

The problem here is that this runner isn't just resting, he's moving backward. Financials have actually lost value since passing the baton a month ago.

How about the runner to whom the baton was passed? In some sense the baton was passed to all the other runners at once. There's no other sector that's down since the top for financials a month ago.

The three other sectors that have done the best since then -- doing about as well as financials did badly -- are telecommunications services, up 6.4%, health care, up 5.8%, and consumer staples, up 4.2%.

Bull markets are sustained by moves in sectors that have a compelling story behind then, a story that captures the imagination of investors and keeps them buying. Of the three that have done the best in the last month, only health care has a good story.

In my judgment, what's driving it is the increasing probability that the government takeover of health care now being rammed through Congress is going to not happen, or at least not happen much. I know it looks like an unstoppable freight train, with the congressional leadership using every trick in the book to get it done by hook or by crook. But I think the reality is that the legislative progress that's been made so far has only been by the narrowest of victories, and has been based on unsustainable compromises between interest groups. When it comes time for the full Congress to really vote on a single bill, I think the only way legislators will be able to agree on anything is by passing a watered-down bill that will have the effect of no bill at all. So health-care stocks are rallying on hopes that when all is said and done they can get back to business as usual.

That kind of story is enough to drive a decent move in the sector. But is it the stuff of leadership for the next leg up in a bull market? I don't think so. It's nothing like the story of the miraculous recovery of the banking sector from the edge of insolvency last March.

Now let's look at the more fundamental question. Is something going wrong with the financial sector? I believe the answer is yes, and this is worrisome, because a healthy financial sector is absolutely key to growth in the overall economy.

I think what's going wrong in the financial sector is a side-effect of the fact that so much has gone right over the last six months. As the economy has pulled back from recession, bank earnings and bank balance sheets have recovered from near-death. But that's largely because the government intervened to save the banks, first in late 2008 by injecting desperately needed capital, but more important, in early 2009 by tacitly agreeing to not shut down banks driven to technical insolvency by declining asset values on their balance sheets. Now that the banks have recovered, government has started to get tough, because it thinks that the banks are healthy enough to take it.

Take a look at all the new bank regulation initiatives that have shown up over the last month -- the time during which the financial sector has lost 6.7% of its value.

First, the Federal Reserve announced its intention to regulate compensation of bank executives and employees as part of its mission to ensure safety and soundness. This makes sense in principle, as it's easy to imagine that some of the out-of-control risk taking that led to last year's credit crisis was the result of perverse incentives embedded in bonuses that looked only at short-term performance. But with any regulation, the cure can be worse than the disease. So a new risk hangs over the banks.

Next, both the House Financial Services Committee and the Senate Banking Committee have produced lengthy and complex "discussion drafts" of legislation for new regulatory regimes. There are important differences between the two versions, but they have in common the creation of whole new regulatory agencies that would keep banks from taking as much risk as they have in the past, and require much more of a capital cushion against what risk they are allowed to take.

After the crisis we've all just barely lived through, it's natural to want to rein in risk-taking by banks. But risk-taking makes the banking world go 'round. Without it, there are no profits. Come on -- every single loan a bank makes is a risk. Yes, it's a question of degree. But for now, the banking sector doesn't know what that degree will be. Will risk-taking be contained at smart levels, or crushed below what's necessary for banks to make profits?

Worst of all is a provision of the House legislation that would empower a new federal agency with the authority to break up any bank that it determines is so big or so complex that it poses a systemic threat to the economy regardless of whether that bank itself is financially healthy. Sounds good if you say it fast. But the reality is that no bureaucrat really knows what is "too big" or "too complex." And under the proposed law, if one of them decides a given bank is either of those things -- on whatever basis! -- then that bank is gone. There is essentially no appeals process.

Say it fast another way: hey, banking sector: if you succeed too much, we'll shut you down.

Scary stuff for banks -- and for the economy overall, because credit is the essential technology of the modern world. Tell banks they can't take risks, that they can't grow -- and you're telling the economy that it can't grow, either.

Bottom line, what's put the financial sector on the sidelines is likely to do the same thing to this whole bull market. I continue to think we're due for a substantial correction while we sort all this out.