The Nasdaq reached new heights today after some positive economic news.

The market has been relentlessly higher for nearly two full months. Such a long rally without a decisive pause always ends in mayhem. Meanwhile, do you think Facebook is over pricing itself?

While short-lived, yesterday's pullback had purpose. Along with the sideways fade over the past week most of the major indices were able to work off an overbought condition.

Despite the fact that the six major U.S. banks have been on the rise for nearly four months now, their stocks remain risky long-term buys.

Morgan Stanley (NYSE: MS) lost $227 million last quarter, but the stock is up 5% in early trading after beating analysts' expectations.

Bank of America (NYSE: BAC) stock is up 6.3% in pre-market trading this morning after the bank reported improved earnings.

Earnings season hits full stride this week, and it could be a very critical week for the bulls.

The market recorded another gain yesterday as the indices continued to consolidate after the big open to start the week.

JP Morgan Chase's (NYSE: JPM) fourth-quarter earnings fell 23% from last year, but the real test for the big banks comes next week.

The increase in volume was excellent to see yesterday, and that increase in volume added further conviction to the bullish move higher past 1280 resistance.

This week's data may not indicate too much about the U.S. economic recovery, but it was good enough to support bank stocks...

Under most circumstances, you should strive to condition yourself to seek out hated, cheap investments.

The movement in the indices over the past month has been anything but crystalline.

The euro has fallen sharply lower by 3% this week, which has corresponded to a similar rise in the dollar. The rise from the dollar brought havoc to the commodities and stock market alike.

Regional banks simply make sense. They are not too big to fail. And that's a good thing.

While investors should be wary of the bank sector as a whole, there is one bank that I believe will rise above the rest.

A big market rally will likely be led by financial stock.

If two of these three trends don't take place, neither will a market rally.
 

The stock market has made some very unusual moves over the last few days. First, oil has rallied right along with the U.S. dollar. Then oil held firm when stocks declined sharply on Wednesday. The safe haven of gold has sold off, even with the escalation of the Italian debt situation. Banks have been weak, even thought the stock market at large has rallied on good earnings and the hope that new leadership in Greece and Italy will actually help.

A little over a month ago Warren Buffett, the world’s foremost investor, announced that he wants to buy back an unlimited number of shares in his own company, Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B) – a promising sign for both Berkshire and the financial markets as a whole.

Greek Prime Minister George Papandreou has agreed to step down. His widely criticized bid to put the Greek bailout to a referendum was his final undoing. But was his proposal so ridiculous?

All major U.S. indices were down by more than 2% on the session, and once again, financials, which are heavily exposed to a European debt crisis, took the largest loses.

The market concluded its fourth positive week in a row with another strong performance from financials.

The market and the euro both tanked following the news out of Greece last week.

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.

Every bank stock was higher, and most rose twice as much as the average stock from other sectors.

Bank of America (NYSE: BAC) missed earnings estimates badly, and tech behemoth IBM (NYSE: IBM) came in light on sales.

The latest rally in the market was initiated with optimism that Europe would come up with a plan, quickly, that increases investor confidence, avoids default and recapitalizes banks.

Big bank stocks were hit hard. The decline followed a bland earnings report from big banking leader, JPMorgan (NYSE: JPM), which promptly resulted in similar declines to big bank competitors: Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).

With the stock market decline over the past two months, this earnings season promises to hold a few extra surprises.

Well, that didn't take long. It hasn't even been a week since EU leaders burned the midnight oil to reach a deal that might help Greece manage its debt and remain an EU member. And yet, Greece is already threatening to derail the process by wanting to put the bailout plan to a national referendum.

October 3rd was the first trading day of the month, and the S&P 500 dropped 32 points. Yesterday, October 31, the S&P 500 dropped 32 points. Coincidence? Absolutely.

Big banks don’t have much of a reputation at the moment. Ok, that’s being kind. People HATE big banks – or at least they have since the infamous subprime mortgage loan crisis in late 2008 and early 2009.

Goldman Sachs (NYSE:GS) Chief economist, Jan Hatzuis is forecasting 0.5% GDP growth for the first quarter of 2012. He also predicts that the Fed will announce QE3 in the next 6-9 months.

Apparently Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) may both shed their "bank holding company" status to avoid Volcker rule restrictions and get back to the good ol' profitable trading game.

Economists have been extremely inconsistent with their economic projections over the past few months, as their views and outlooks seem to be swayed by their emotional response to the economy and stock market.

Today, I would like the bulls to retest 1175 resistance and stay above 1131 support. Obviously, staying above 1155 and rallying past 1175 would be better, but SPX has recovered 6.4% from its low; buyers should be happy with that turn.

The market pulled back Wednesday, a move we expected following Tuesday’s price action. The big tip off that a pullback was near came from the underperformance in bank stocks on Tuesday.

The banks led the indices higher on Monday following bailout rumors in Europe. In fact, most bank stocks were up over 3% on the session. But those same bank stocks, like MS BAC, C, and JPM could not hold those gains on Tuesday despite a huge rally in the other indices. 

It's hard not to miss the tone of Germany's leader, Angela Merkel, who, over the weekend, said Europe must be able to put a "firewall" around Greece to prevent a cascade of market attacks.

After Congressional Republicans sent Fed Chief Bernanke a letter that politely demanded the Fed cease on desist on all stimulus activities, I half expected Bernanke to drop a liquidity bomb on the market yesterday.

The market seems to be expecting Bernanke to do something. Perhaps he will announce the "twist" selling out of short-term Treasuries and buying the long ones.

Forgive me if I am forced to delve into Europe and its debt again today.

U.S. Money Market funds aren't buying as much Euro-bank debt anymore.

Not only are we failing to get any traction to employment due to the stagnant economy, companies that have screwed up are continuing to shed payroll to get costs in line with their revenues, companies like Bank of America (NYSE:BAC) and Cisco (Nasdaq:CSCO).

Before I begin my usual market commentary, I'd like to remind you of a very special offer from my friend and colleague, Andy Crowder.

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The market popped again yesterday. The gains were larger on Monday, but it was still a strong showing by the bulls to rally the U.S. indices for a second straight day.

If (when) Greek defaults, European banks will suffer losses to their capital base. They may have to raise cash with secondary offerings and perhaps sell assets., and U.S. money market funds that own European bank debt will likely have to do some maneuvering.

The bigger issue for Europe is Italy and Spain. These two are much bigger than Greece.

The market did not do much yesterday. The indices started the day moving higher, but around noon they fell back and closed in the red.

The decline was entirely expected and needed. Many indices had moved up 6% in two days, so it was natural that they consolidated yesterday, especially with no news.