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Big banks have staged a huge comeback from the abyss as market participants see hope coming out of European summit meetings to stave off a widely dreaded contagion of downgrades and defaults that threaten the global economy. Big banks on average have rallied more than 15% over the past month and have outperformed the S&P 500 Index ETF (NYSEARCA:SPY) (see chart below - click to enlarge).

bac c jpm wfc kbe

While the rally has certainly been robust, big banks are still down sharply year-to-date (about 20.43%) based on SPDR S&P Bank ETF (NYSEARCA:KBE) compared with a 3.17% year-to-date gain for the S&P 500 Index ETF SPY. The SPDR S&P Bank ETF (KBE) seeks to closely match the returns and characteristics of the S&P Banks Select Industry Index ((SPSIBK)) before expenses. KBE’s top ten holdings are as follows (click to enlarge): kbe top ten holdings
Investors who were fortunate to catch the bottom on big banks might consider taking some chips off the table while European leaders iron out details of the massive sovereign debt restructuring/rescue plan. Any hiccups or signs of trouble in the deal will not treat bank investors kindly or investors in general for that matter. Moreover, big banks face headwinds on several fronts including higher regulatory capital, lower net margin interest due to operation twist, and let’s not forget the persisting foreclosure quagmire.

Disclosure: I am long SPY. I hold a covered call position in WFC.

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