Like a middle school high jumper, companies are getting plenty of credit this earnings season for clearing very low bars.

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.

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.

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.
 

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.

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.

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

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.

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.

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.

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).

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.

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%.

Well, summer trading is now over. Labor Day is past (I hope you enjoyed the holiday) vacations are done, and we should be getting back to full participation in the stock market. August, especially, is usually a very light volume month. But the one that just ended was an exception, as the near default, and S&P downgrade were met with extreme volume, and point declines.

So what do we have to look forward to, now that Fall trading is here?

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.

The market slumped lower yesterday and the bulls lost their four day winning streak. Volume was low in the decline, as it has been for most of the week.

Financials were the big losers yesterday; bank stocks, including Bank of America (NYSE:BAC) JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) were all down more than 3%.

The market ramped higher yesterday, and fooled nearly everyone with its surge. On little news the indices tracked 3% higher and blasted through hearty resistance zones. Financials were the big movers and have really been on a huge rally ever since Warren Buffett pledged $5 billion to struggling BAC.

The SPX opened with a gap higher that took it to 1197. And to be perfectly honest I had thought the index would settle around that area for most of the session, maybe even sink back to 1175. Instead the index plowed higher to close at 1210, only a percent shy of 1220 resistance.

The market sank yesterday, but the selling pressure was hardly strong, or unexpected. Volume levels were naturally high. Not only did news that Steve Jobs resigned raise the volume for AAPL, but Warren Buffett pledged $5 billion to the struggling bank stock BAC. Both announcements were huge news for each company (BAC was momentarily up 15%), and both of their stocks happen to be some of the larger index components.

Yesterday morning I mentioned the two hurdles SPX faced. First, was 1175 resistance area. Second was the resignation of Steve Jobs and potential for a large decline to AAPL.

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.

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.

I’m finding it difficult to express my anger and frustration at our dysfunctional Congress. Their inability to get some kind of budget passed is appalling. And it’s costing us a good rally for stocks. The Dow Industrials would probably be 1,000 points higher if these children would simply do their job.

If they worked for me, they’d have been fired long ago…

It was an interesting day for earnings. IBM (NYSE:IBM), Wells Fargo (NYSE:WFC) and Coca-Cola (NYSE:KO) came in great. Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC), well, not so much.

Actually, Bank of America would have been pretty good, were it not for the $9+ billion the bank set aside for mortgage settlements.

It’s really necessary to pick and choose bank stocks. Some, like JP Morgan (NYSE:JPM) and Wells Fargo are doing well adjusting to new rules and dealing with mortgage issues.

The market pulled back hard yesterday. The selling was intense and financials led the indices lower after problems in Europe surfaced in the morning. Despite the 2% decline, all indices held their must hold support levels: SPX 1301, Nasdaq 2700 and Russell 800.

 The troubles in Europe resulted in a positive move for the dollar, which in turn resulted in a decline to industrial commodities. That downward selling pressure then bled into the other indices. The decline in the euro stemmed from insufficient stress testing in Europe, which increased the perception of contagion by the weak banks. Despite the fundamental concern surrounding the euro I have a long position in the unloved currency.

I took the long position on Friday, but held it through the pathetic emotional sell-off yesterday. I am looking for $1.44.

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.

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.

I'm sure Daily Profit readers think I have an unhealthy obsession with the "too big to fail" banks, especially Bank of America (NYSE:BAC).

After all I tend to talk about the banks a lot. I try to keep my coverage balanced, discussing their past transgressions, current issues and future opportunities with somewhat equal word counts.

Lately, I've been mostly focused on their current issues, as a way to gauge future opportunity. (The "past transgression" category is somewhat irrelevant at this point, unless JP Morgan's Jamie Dimon wants to whine about unfair treatment.)

It's long been my opinion that the banks are getting what they deserved. Actually, they are probably getting less than what they deserve. But at the same time, the banks are a critical component of the economic recovery. They serve as a ready microcosm for all that ails the U.S. right now, which can be summed up by one word - debt.