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.

With weak earnings from the banks and minimal economic data to embrace, I took a bearish position yesterday.

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

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.

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

Bank stocks, and the other indices for that matter, will have to overcome some heavy bearish news today.

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

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

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.

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).

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.

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.

It’s easy to see how extra cash will help credit card companies. And overall, this is a very good move.

We knew bank earnings wouldn't be good. Analysts have cut their estimates for Citigroup (NYSE:C) several times over the last month, by an average of about 20%. So maybe it's a good sign that Citi beat expectations handily...

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.

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.

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 was slammed yet another time yesterday. Although unlike Thursday and Friday, the indices recovered into the close.

Once again financials led the charge lower and the big banks like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) were down 3%. Energy and technology components were also hurt and stocks like Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) were down 1% and Exxon Mobil (NYSE:XOM), Apache (NYSE:APA), Continental Resources (NYSE:CLR), which we're short, and Halliburton (NYSE:HAL) were down 2%.

The Lisbon Treaty was signed by EU member nations in 2007, as a sort of make-up treaty to correct some of the mistakes from previous EU treaties. Turns out, there's a "no bailout" clause in the Lisbon Treaty. Who knew?

And by the time you read this edition of the Daily Profit, Germany's Constitutional Court will have voted as to whether the EU's bailout fund for Greece et al violates Germany's democratic constitution.

The market was slammed again on Friday. Volume was light, due to the holiday, but the indices slipped by over 2%. Once again financials led the charge lower and the big banks like JPM, WFC, GS and C were down nearly 5% while BAC lost 8.3%. And the worst of the decline is not over.

The FHFA sent lawsuits to 17 banks. And the amount that was sought is in the billions of dollars. But the fear on the street is that if banks pay one settlement for a fraudulent mortgage, hundreds more cases will follow. And with $5 trillion in questionable loans, the banks are on the hook for a large sum of cash.

It's always nice to know that stocks can actually rally. And seeing stocks build on their gains throughout the day is a bonus.

Yesterday's rally appears to be a mix of relief and short-covering. For instance, I suspect the move for Citi (NYSE:C) was helped along by shorts saying "enough is enough" and covering their downside positions.

You'll notice that Bank of America (NYSE:BAC) finished in the red, though off its' early lows. Investors are still bearish on banks.

The market salvaged a gain yesterday, but it was an unenthusiastic win for bulls. Volume was up, but that was about the only good thing I could say about yesterday's price activity.

Banks and oil stocks sank and the rest of the market muddled through the afternoon in an uneventful session.

In the morning, pre-market, the indices were poised to record a huge (positive) day. And the indices, along with just about every stock (up to down volume 15 to 1) was up in the morning.

Growth forecasts for the U.S. are being drastically cut after yesterday's disastrous Philadelphia Fed manufacturing survey. Economists predicted slight expansion, instead we got the worst reading since March of 2009.

JP Morgan (NYSE:JPM), who just cut its GDP forecasts, cut them again. And the cuts are big. From 2.5% to 1% in the 4th quarter and from 1.5% to 0.5% in the 1st quarter of 2012.

Citi (NYSE:C) was less dramatic, cutting 2012 growth from 2.7% to 2.1%. Citi also cut earnings estimates for the S&P 500 by around 4%.

The market fell by nearly 1% yesterday. Volume stayed high, but was nowhere even close to the levels of last week. And in sharp contrast to Monday's session, energy and bank stocks were murdered.

The big banks felt the worst the bears could offer yesterday as BAC (-4%), JPM (-2%) and C (-4%) led the charge lower in the financial sector.

More notable than the drop in big banks or big oil stocks was the inability of the bulls to maintain SPX 1197.

The market was obliterated again on Wednesday as the bulls lost nearly all of their hard earned gains from Tuesday. Volume was jacked once again as investors sprinted away from the big banks and financials, which led the indices lower.

The big bank stocks like BAC, C and GS had it much worse and were down 10%, while WFC, BAC and Warren Buffett's Berkshire Hathaway were down 7%.

Yesterday was a critical loss for the bulls. Going into Wednesday every index had form a reversal pattern. And each of those reversal patterns were on high volume. The SPX, for example, formed a bullish harami that took the index back up to 1175 resistance.

In 2008, we knew that the mortgage-backed securities depleted the cash reserves at banks to the point that they were insolvent. In January of 2010, it was the uncertainty of Greek sovereign debt along with other European countries that caused a very sharp pull back for stock prices.

But it's more difficult to find a culprit for the declines we've seen lately.

Yes, there have been weakening economic data, to the point that GDP growth may be below the 2% line. That's close enough to negative growth that some are throwing around the "r" word: recession.

The market lost its early gains yesterday and the indices finish red. The decline was mild and followed a very bullish session on Tuesday. Volume was lower than I expected given the high volume session from AAPL.

Despite the dull session, I am still bullish. It looks like SPX is consolidating at 1332 resistance before its next move, which should be a rally to new highs.

The market is only a few days into earnings season, but thus far the results have been quite mixed. Corporate profits, and to a certain degree, revenues, grew at an above average pace. But margins and management guidance have generally disappointed.

The market severely and unexpectedly dipped yesterday. Especially in the Nasdaq, which was down nearly 2%.

Volume also raced higher as the indices transitioned from gains following positive employment, inflation and sales data; and then quickly turned negative by noon.

In addition to the great economic data JPM blew away analyst estimates. The positive news from JPM had most big banks up 1% to start the session, but by midday the financial index was down 1%.

Google (Nasdaq: GOOG) killed it last night. Earnings growth was an amazing 36% over last year. This morning, analysts are scrambling to get their new price targets for Google out.

JP Morgan (NYSE:JPM) turned in a very solid second quarter earnings report this morning. Revenue was $2 billion better than expected, at $27.4 billion. And earnings were $0.06 better than expected, at $1.27 a share. This was the 11th consecutive quarter that JP Morgan has beaten.

You'd think analysts would be able to adjust their estimates to account for the consistent out-performance at JP Morgan. And truth be told, they probably are.

But there are so many little things the company can do to get its quarterly numbers that analysts have little chance of nailing it.

Well, Alcoa (NYSE:AA) managed to meet on earnings, and beat on revenue. All in all, I'd say that's pretty good. I'll also say it's a darned good thing Alcoa came in good. After a day like yesterday, investors needed some good news, or at least some "not bad" news.

The S&P 500 dropped below support at 1,320, though only by a point. Volume wasn't particularly heavy, so we shouldn't read too much into the 1,319 close. In fact, yesterday had all the makings of a bear trap: negative headlines, a drop through support, right at the outset of earnings season.

Of course, we will need to get some more positive earnings news to turn the tide. And we will have to wait for Thursday when JP Morgan (NYSE:JPM) and Google (Nasdaq:GOOG) report.

Now, here's some reader mail.

The market soared higher yesterday. I can't say volume was great, but it did increase.

Financials were a big part of the rally, which was great to see because that sector has certainly slumped behind over the past three months.

The big banks popped yesterday after a better than expect ADP jobs number was announced.

JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC), Citi (NYSE: C) and Wells Fargo (NYSE: WFC) rallied 1.7% from that news. The ADP reported that in June 157,000 private jobs were added, which was ahead of the 70,000 widely expected and the 36,000 in May.

It's good to know the financial markets, and the government's legions of economists and statisticians, have a sense of humor.

No sooner do I say that the economic "soft patch" we've been experiencing may be ending (based on UK and German manufacturing data), the jobs number comes in absolutely awful.

Ironically enough, I received this email from a Daily Profit reader John M:

I truly hope that you are correct that the soft patch is over. Unfortunately in my little world, I do not think that is the case.