The Calm Before the Next Bank Storm

By Eric Roseman

As expected, stocks are charging higher since Wednesday following weeks of protracted selling. That's not a surprise - I've been saying we could see a big rally because the VIX was heavily overbought.

A dose of good news finally arrived last Thursday following Wells Fargo's (WFC) Q2 earnings report. A day earlier, State Street Bank (STT) also delivered better than expected numbers. And yesterday morning, Bank of America (BAC) announced their Q2 profit fell less than expected.

The result, of course, is an incredible rally for financials. Heading into Wednesday's trading, the financials were down more than 55% from their highs last summer. Since financials also represent the largest index weightings for international indices, it's no wonder foreign markets are also running hard along with Wall Street.

On Wednesday, bank stocks posted their best single-day rally since 1989, gaining more than 17%. More of the same is expected today following J.P. Morgan's (JPM) numbers.

I'm not sure those numbers are worth uncorking a bottle of champagne for though.

From where I see it, these results are just forecasting worse things to come. All we're seeing now is a dead-cat bounce following weeks of relentless financial sector pounding.

The sub-prime debacle has now largely been written off by most American, Canadian and European banks. But what lies ahead is worse. Consumer loans are now coming undone. Banks are witnessing a significant rise in delinquencies, which I expect to rise dramatically as the economy and employment trends worsen over the next several months.

In a bear market, a dead-cat bounce is typical market action following weeks of pervasive selling. More banks will fail this year, more write-downs will occur and the Fed can't reduce interest rates any further because of the highest inflation in 15 years.

Sell into market strength.

Disclosure: None

Comments

[rm516:]

Too much Gloom and Doom.
Bad credit is behind us, good days are ahead...

2008 Jul 22 05:42 AM

[buyitcheap:]

Agreed, though I think we'll get a pull back and if the volumes are there, we may get a pretty hefty push upward for BAC to hit upper 30s again. (I guess that's a good thing - can't believe how far its come down.)

2008 Jul 22 07:13 AM

[GVillageNYC:]

Totally agree. You may not like the doom and gloom, but analysis should not be based on hopes and preferences, but on facts. The debt of consumers, and yet more homeowners, have yet to hit the bottom line of financial institutions.

2008 Jul 22 08:10 AM

[notsosmart:]

thats the whole problem. there are many people who think gloom & doom will go away if you dont talk about it.this situation could have been topped if gloom & doom had been predicted & acted upon.like in days of yore-if someone had cancer it wasnt mentioned in hopes it woul go away.weird

2008 Jul 22 10:32 AM

[morgan77:]

Saw that the housing sector was the big winner last week and did a little more research on it. This article (www.greenfaucet.com/fa...) argues that housing may finally have reached a bottom. Check it out if you're interested in buying.

2008 Jul 22 11:54 AM

[Emerald:]

This market is definitely a bear market bounce and the trend is down. However, the best money is made if you dollar cost avarge into financials and have at least a three year time horizon. Money can be made in dooom and gloom.

2008 Jul 22 03:01 PM

[TJ Schoenlein:]

I always smile when I read this type of article. Of course the market is doing exactly like author said it would..?? It's so easy to spin market action to fit your point of view and this author is no exception.
Most of us know that the markets bounce up and down on a daily basis..so what's new? The banks are ( were ) so far down the toilet that there has to be a bottom somewhere. ( unless you believe that banks are dead, forever, ) I have a long term view and this type of chatter is.. well.. just noise. I've put my money on banks as banks make money.. lots of money.

2008 Jul 23 12:31 AM

[Takayama:]

Don't be fooled. The worst is yet to be imagined.
When stocks are oversold, naturally a technical correction follows.

Crisis of this magnitude occurs once in 50 years, and cannot be reconciled in such a short span of time.

2008 Jul 23 04:20 AM