What the Big Banks Need
The market posted a big loss yesterday. And that's good, it makes sense. The market has rallied over the past week on nothing substantial: only on bailout speculation. But yesterday's decline made sense.
The indices were up against strong resistance, Apple (Nasdaq: AAPL) delivered its first quarterly miss of the decade (maybe century), and Germany and the rest of Europe denied the $2.7 trillion big bank bailout rumor that got the bulls back in the market Tuesday. So I was pleased when the indices moved lower yesterday - they really should have.
Also, the decline was not severe. Yesterday the indices declined less than a percent. Technology outpaced other sectors because AAPL, which represents about 20% of the technology index, was down 6% on Wednesday.
Apple support can be found at $391. The banks also gave back some of their gains from Tuesday. As a group, bank stocks were down 1.4%, but some of the big bank stocks were slammed hard: Bank of America (NYSE: BAC) down 4%, JPMorgan (NYSE: JPM) down 2%, AIG (NYSE: AIG) down 3%.
The earnings reports from the big banks have been a shame. And I really do mean a shame, because they recorded profit but not due to operations. The profit was a result of mere gimmicks in accounting. All other aspects of the financials were terrible. In fact, they were reminiscent of 2008.
The reports that came from other, non-financial, business segments were good. Although technology stocks like AAPL and IBM (NYSE: IBM) declined after they reported, Intel (Nasdaq: INTC) and Google (Nasdaq: GOOG) moved significantly higher. And no company from that list reported a bad quarter. All banks had bad quarters; the year to date results weren't pretty either.
Investors had expected the worst from the banks, which is why the financial index was down 30% since May. The market will not be able to break 1250 resistance and rally higher without the bank stocks. Right now, the banks are likely to move sideways; a few might push higher, as they recover from a dreadful move lower during August. But the banks will not rally until there is stability in Europe.
The European bailout has taken about 90% of investor focus, and caused participants to ignore good economic data and modest earnings results. Today France and Germany, which are the two biggest voices, will meet again to discuss possible options.
While I doubt a deal will be struck today, the market will not wait forever. I would expect a sharp pullback to at least 1155, likely 1115, if Europe cannot get their affairs in order and pen the bailout.
