Don Miller: Based on recent performance from the sector’s biggest names, it’s easy to argue that financial stocks are making a comeback. Capital One Financial Corp. (NYSE:COF) is up 27% in 2012. Citigroup Inc. (NYSE:C) is up 29%. Bank of America Corp. (NYSE:BAC) is up a whopping 59%. Read more…
Shah Gilani: Finally, some well-deserved help for beleaguered monster banks is on its way. Make that, well on its way. Those poor big banks accidentally and inadvertently got caught up making so many easy loans to deserving, hard-up borrowers, who wanted to buy overpriced dream homes, and a few million other Read more…
Chris Ciovacco: Since financial stocks make up 14% of the S&P 500 Index, it is difficult to sustain a rally without strength in banks and financial services firms. With the Fed and ECB opening up the liquidity fire hydrant in late December 2011, bank stocks experienced another in a series of monster bailout Read more…
First, April was not nearly as good as the bulls made it to be. Yes, the Dow Jones Industrial Average ($DJI) surged 5.5% during the first half of the month. But, in the second half, momentum slowed with the average rising just 1.7%.
Even then, the statistics don’t tell the whole story. From the Apr 16 close to the Apr 30 close, the Dow gained a mere 43 points, or 0.5%.
That’s a big difference in return for someone who bought the Dow Diamonds ETF (DIA) on Apr 16 instead of just a couple of weeks earlier. (DIA is an ETF that tracks the performance of the Dow.)
Secondly, volume is not signaling a lot of conviction on the part of buyers. Throughout March, the SPDR S&P 500 ETF (SPY) experienced average volume of 400 million shares per day. In April, daily volume declined to 287 million shares.
Yet, during this entire time, stocks have risen. And the higher they go, the more the rally is losing steam. That’s not good.
Thirdly, I’m worried about the banks.
Yes, everyone passed the stress test, but it was a questionable test to begin with. Plus, Bank of America (BAC) and 9 others have lots of time to raise funds. But, foreclosures are still rising, credit card defaults will get worse and, despite all of the analysis, nobody still knows how to value the toxic assets.
The government might keep the large banks afloat, but their stock prices and earnings could still suffer. And that alone would cause problems for the stock market. Not to mention that financial stocks (and related ETFs such as Financial Select Sector SPDR (XLF)) are overdue for a pullback based on technical analysis alone.
Fourthly, as earnings season comes to an end, we should see fewer positive revisions to profit forecasts. The ratio of positive to negative revisions typically falls after earnings season, even during good times. I don’t see any reason for this to change.
A drop in positive revisions would be one less catalyst for stocks to go higher.
Finally, the General Motors (GM) situation remains unresolved. If bankruptcy proceedings turn messy, it will cause a big disruption across the entire automotive industry. This, in turn, could create problems for the market.