Take Note of Banks' 'Stress Tests'

We’ve been talking about the potential for a second market drop, bringing to light the specter of the “double bottom,” and the possibility the current market increase is nothing more than a bear market rally.

But even with some of the negative earnings, housing starts and manufacturing figures we’ve seen, the major indices have gained over the past few sessions in choppy trading.

It doesn’t appear like there’s anything on the horizon that could destabilize the markets enough to send them lower… or is there?

The only thing that we can see that has the balance shifting power to send the broader markets sharply lower at this point is a government announcement or action…

Hmmm… Like the delayed announcement of the bank “stress test?”

If these tests point to a weaker banking system with the United States being required to invest in (read: bail out) banks that they’ve already sunk billions into, it could be politically unpopular and hit the markets hard.

If that happens, we could see a pullback of 30% from current market highs.

We’ve already known that the banks receiving funds will not be allowed to fail. What we don’t know is the extent of the credit damage, and just how much it’ll take to make these companies solvent.

The delay from results to announcement could give the administration time to use them best to “cheer up” the markets. The news could be great, and the administration could be concerned no one will believe them… It could be the reason why U.S. regulators have detailed the procedures behind them.

The interesting thing for investors is the potential for the results of these tests to send the market sharply up or down.

On the other hand, if the news was good, shouldn’t we have heard already? Isn’t good news something you want to rush to the press? The delay could be a clever explanation as to why the banks didn’t do well.

And either way, it could be an incredible buying opportunity. It’s why we’ll be paying close attention to their release in May.