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Did the Wells Fargo News Just Extend Our Rally?

|Includes: SPY, Wells Fargo & Co. (WFC)

Not so fast!  While Wells Fargo's positive earnings projections are significant in showing that the banking sector can still make a profit, there are still strong reasons that our current rally will slow in the short term.

1. WFC's projections reflect bank profitability, not economic growth.  Wells Fargo projects that they will make record profits this quarter, but it's important to keep in mind the reasons behind those profits.  Obviously, their acquisition of Wachovia contributed to their "record profits".  Another big contributor was their mortgage business, which benefited from a wave of refinancing and from new customers turning away from smaller competitors in favor of the seemingly safer Wells Fargo.  Note that these factors are specific to banking and do not reflect positive economic performance or consumer sentiment.  It's not as if consumers or businesses are borrowing significantly more money today than they were yesterday.

2. Earnings season won't be rosy for everyone.  Keep in mind that we're still in the middle of earnings season and that while several companies will have positive things to say, many will show that their struggling beyond expectations.  Chevron has already warned of "sharply lower" results, and surely Chevron is not alone.  Investors are concerned about earnings, as demonstrated by the low-volume selloff that we had right before earnings season.  People are nervous about earnings and when it's obvious that some companies will come in with weak numbers, investors will be unwilling to jump into the market wholeheartedly.

The news out of Wells Fargo today was great news for the banking sector, but look for the two factors above to provide the market with some resistance, and look for the market to trade sideways through earnings season.

Disclosure: No positions