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.

The rally in financials is likely the start of something big, and both investors and traders need to be prepared to flip bullish on banks during 2012.

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 weakened a little on Monday. Fears spread that the U.S. government would default on its debt obligations, which spurred a big sell-off in China and impaired the U.S. indices for most of the session. Treasuries fell substantially as bond traders demanded higher rates after law makers in the U.S. failed to produce a 2011 budget.

Despite a mild price decline, the indices experienced heavy volume selling. All sectors fell and only utilities and big cap technology stocks held value.

Amid the modest decline the TradeMaster portfolio added two new positions.

The market ripped higher yesterday after a consolidation session on Wednesday. Volume was jacked as the indices overcame short term resistance areas and pushed up towards fresh highs.

The market had a lot going in its favor yesterday. First, second quarter earnings have been good thus far, and the market is still riding on the bullish sentiment following AAPL, GOOG, IBM and the rest of the great technology earnings reports by big companies. Second, the EU finally got its act together and formed a bailout package.

The market rose modestly yesterday. Volume was average and the bulls were able to fend off the strong selling pressure from earlier in the weak. But the indices finished far off the session highs, which shows us the bears are out there.

The indices overseas were mostly lower today, although Europe got a slight pop after JPMorgan (NYSE: JPM) second quarter earnings were announced this morning. JPM stock was also up 3% following that news. The mega U.S. bank once again beat estimates and grew profits. JPMorgan reported $5.4 billion in income or $1.27 per share in the second quarter. That compares with earnings of $1.09 one year ago.

The market, and the bulls, lost a sizable amount of ground yesterday. On high volume the indices were devastated and no particular sector held up well. Energy and financials were crushed, and both

The market stabilized yesterday as the indices finished flat after a rocky session. Volume was low again, which is par for the course now that we are fully into the summer doldrums.  The stability

The market was hacked again on Friday as volume swelled and stocks deflated. The decline concluded a week full of declines in the market. In fact, it also marked the sixth straight week of downward

The market was hit hard again yesterday. Volume raced higher as all major indices plunged at the open. Perhaps the worst (and most telling) aspect of the decline is that it occurred on no news.  News

The market ripped higher yesterday led by tech and energy stocks. Volume was unimpressive during the rally that occurred amid no significant news. But no matter what reason the market had for going

The market blasted higher out of the gate yesterday. Although it moved (painfully) sideways with almost no activity for the rest of the session. The rally was mainly bolstered by energy and industrial

The market closed down again, but the selling was less decisive. The indices had spurts of positive trading during the day as well. Energy stocks sold in late day trade as oil prices declined from

The market edged lower, but once again buyers prevented the declines from collapse. Banks and energy showed weakness in today's session - and both sectors look ready for more declines.  Despite my

The market hit new highs as the buyers kept the gravy train running smoothly. Volume was good today and financials and energy both rebounded after dismal showings on Tuesday afternoon. Investors

The stock market failed to build on the rally from Friday. The S&P 500 fell below support at 1,050 yesterday.

Right now, sentiment is just awful across the board. And we're heading into what's traditionally the worst two months of the year for stocks: September and October.

Volume in the stock market has been extremely light. This suggests that individual investors are not buying stocks. And we can see that in mutual fund flows. In July, bond funds attracted $25 billion dollars. And investors pulled $12 billion out of U.S. equity funds.

I bet we can all think of a better way to kick off the 4th quarter than a big 200 point drop for the Dow Industrials. We've all heard the bears declare the end is near for the Cash for Clunker Stock Rally. So, is this the end?

Looking around at the Clunker stocks, we they outperformed on the downside yesterday. Bank of America (NYSE:BAC) lost 4%, Citigroup (NYSE:C) dropped 6% and AIG (NYSE:AIG) fell 7%. Wells Fargo (NYSE:WFC) was down 5%.

CIT Group (NYSE:CIT) was hammered for 45% on Wednesday after it said bankruptcy is still a possibility for the troubled company.

Overall, the banking sector, as measured by the Financial Sector ETF (XLF), fell 4.6%. And the UltraShort Financials Inverse ETF rallied nearly 10% since Wednesday's close.

Of course, we might expect financials to bear the brunt of any selling. What about some of the other measures of economic health...like oil?

Opening volume was higher in this morning's session with all the major indices, except the Dow, trading in the negative. As of press time at 10:40 A.M. Eastern the Dow is trading just positive at 8,768.67 while the Nasdaq and S&P 500 were down 0.10% and 0.04%, respectively.

Leading small cap gainers today was Real Goods Solar (Nasdaq:RSOL) up 42% on news of a $30 million contract to install a solar power program for the Freemont Union School District in California. RSOL is a commercial solar energy integrator in the California and Colorado markets.

Other gainers in this morning's session include Cadiz (Nasdaq:CDZI) up 40%; American Woodmark (Nasdaq:AMWD) up 18.9% on posting a surprise Q4 profit; and Chinese solar firm Renesola (NYSE:SOL) up 16.9%.

Small cap decliners include United PanAm Financial (Nasdaq:UPFC) down $1.02 to $2.96 for a loss of 26.1% after a notice of delisting from the Nasdaq; Hawkins (Nasdaq:HWKN) down 14.1%; Exide Technologies (Nasdaq:XIDE) down 16.2%.

No sooner do I say that the news cycle is turning negative, we get some significant upgrades in the financial sector. Goldman Sachs (NYSE:GS) got an "outperform" rating and rose 5.2%.

RBC Capital Markets called KeyCorp (NYSE:KEY) a "top pick" and the shares ramped 20%. And Fifth Third Bancorp (Nasdaq:FITB) rose 7% after it reported that it has filled the capital shortfall identified during the Treasury's "stress tests."

At least for a day, the financials re-took their leadership for the markets. Though it should be noted that the Financials ETF (AMEX:XLF) has not made a new high, and the financials are sharing the stage with energy stocks.

*****Money managers report that a lot of cash is sitting in the sidelines. Both individual and institutional investors have been slow to get back into the stock market.

Of course, that's exactly the scenario that can keep stocks moving higher. At least, so long as the economic data doesn't take a turn for the worse.

*****Citigroup reported in a research note that put options volume is picking up and so is the Volatility Index, the VIX. Investors buy put options to profit form downside moves for stock prices. Institutional investors protect gains in large portfolios with put options.

The VIX measures the cost of put options. When it rises, it means that investors see increasing risk in the stock market. Citigroup's chief technical analyst, Tom Fitzpatrick, believes the rise in the VIX is showing "strong warning signals" for the rally.

*****Bulls vs. Bears, fear vs. greed - that's what it always comes down to. Will the analysts who see better times ahead for the banks win out? Or will those who see "warning signs" be right? As always, we'll see…

*****The gains just keep coming for SmallCapInvestor PRO stocks. Since March, we've seen a 152% gain from our top oil stock, and we had Genco Shipping (NYSE:GNK) hit triple-digit territory before recent weakness took it below that threshold. 

Now, one of our top China stocks is knocking on the triple-digit door.  The obvious catalyst for this stock will is that it moves off the over-the-counter market and starts trading on the Nasdaq as soon as today. I expect the increased exposure to help drive the share prices higher. 

This stock blew through our conservative $8 price target. The new listing and rising prices for its product will have a positive influence on shares. Our target price is being raised to $14 per share. That's about 40% higher from current prices. 

I am very bullish on Chinese stocks. And SmallCapInvestor PRO now has 3 Chinese stocks in the portfolio. In fact, we just added one on Wednesday. I've put all three stocks in a brand new Special Report called "Going for Growth: 3 Top Chinese Stocks to Buy NOW." Find out how to get your copy HERE.

Small Caps putting up the biggest gains at press time (2:30 P.M. Eastern) include La-Z-Boy (NYSE:LZB) up 36.2% after an upgrade to strong buy from Raymond James, Atlas Pipeline Holdings (NYSE:AHD) up 30.2% after announcing a joint venture with Williams (NYSE:WMB) to expand Atlas's presence in Pennsylvania, Tivo (Nasdaq:TIVO) up 51.1%, Human Genome Sciences (Nasdaq:HGSI) up 16.7%, and Applied Signal Technology (Nasdaq:APSG) up 16%.

Big decliners include energy darling Valero (NYSE:VLO) down 18.3%, CVR Energy (NYSE:CVI) down 17.4%, Frontier Oil (NYSE:FTO) down 14.9% as crude oil inventories spike to 2.9 million barrels based on data from the U.S. Energy Information Administration.

Yesterday's darling stock, Green Plains Renewable Energy (Nasdaq:GPRE) was one of today's dogs lose 16.2% as volume slows from Monday and Tuesday's trading sessions.

As of press time (2:30 P.M. Eastern) all major indices are off with the S&P 500 leading the decline by a 2.0% drop, followed by the Dow sloughing off 1.5% and the Nasdaq down 1.4%. The Russell 2000 Index, comprised of the 2,000 largest small cap stocks was down 8.5 points, or 1.61% to 518.13.

*****Russia is grumbling. Seems they are not happy that rising debt, slow growth and record Treasury bond sales are dragging the U.S. dollar down. In fact, Russian president Medvedev is calling for some kind of global currency to replace the U.S dollar as the world's reserve currency. (Sound familiar? Like he's taking a page from the Chinese?)

In an interview with CNBC on Monday he said, "We need some kind of universal means of payment, which could create the basis of a future international financial system…"

Of course, this is a horrible idea. As one analyst put it, "It took decades for the euro to be established. I can only imagine how long it would take for the BRIC countries to put together a currency."

*****It's an investing truism that the financials always lead the stock market. Recall that it was bullish comments from Citigroup that kicked off this rally back in early march. And I'm sure nobody needs reminding that it was the financials that kicked off the worst bear market in 80 years.

When the S&P 500 and the Nasdaq blew through their 200-day moving averages on Monday, the financials were out in front. But today, even though the major indices finished with slight gains, many financials finished in the red.

American Express (NYSE:AXP) dropped nearly 5%. JP Morgan (NYSE:JPM) lost 4.46%. Wells Fargo (NYSE:WFC) lost 4% and Citigroup (NYSE:C) lost 4.88%.

Bank of America (NYSE:BAC) is about the only major financial stock to finish in the green, and that was a 1.7% gain. In fact, the Financials SPDR (AMEX:XLF) failed to make a new recovery high along with the Nasdaq and S&P 500.

So what gives? Why have the financials underperformed, and why were they weak today?

*****One clue comes from the Healthcare Select SPDR (AMEX:XLV). As you may know, healthcare stocks are considered defensive stocks. That's because their revenues are seen as being stable as healthcare is a necessary, as opposed to discretionary, expense.

In difficult markets, institutional investors will park their money in healthcare stocks as a way to maintain exposure, but lower risk.

If we compare the Healthcare SPDR XLV to the Financial SPDR XLF, we see an interesting divergence starting on May 8. Healthcare has been trending up since that date. And the Financial SPDR has been trending down. To me, this looks like sector rotation.

It appears that institutional investors are moving money out of aggressive financial investments and into defensive healthcare stocks. When the institutional investors start playing defense, individual investors should pay attention.

*****Technical analyst for TradeMaster Daily Stock Alerts, Jason Cimpl, thinks the rally has about another week before we start seeing some downside. And for good measure, he recommended that his readers take their 29% profits on Fushi Copperweld (Nasdaq:FSIN). This trade took less than 3 weeks. Nice job, Jason.

Jason is still holding the two stocks you may have learned about from the TradeMaster video I included in yesterday's Daily Profit. In case you entered either trade, you should know that Jason has recommended a stop loss for FXI at $35.15 and UNG at $12.60. If you missed the video, you can check it out HERE.