Recovery..Bounce..Bear Mkt Rally.

After Fridays surprise increased profit announcement from Wells Fargo that catapulted the market through 850 on the SPX, which was technically a break out, I had many people call me over the weekend stating that "its time to get back into the market". WRONG.

Don't get me wrong...Fridays action was very positive, but the gains were made on declining share volume. Also, although the Wells Fargo news shocked the market to the upside, most of the upside to earnings came from a lower loan loss reserve number and some adjustments to FASB accounting of securities on their books. But in the final analysis, this was good news, and the shorts had to cover their bets. Even after the run up Friday, the Dow and the SPX are down, while the NASDAQ is actually showing gains for the year. I had previously stated that once the market regains some footing , the NASDAQ is the place to be. The earnings power for technology is much better at this moment then in other sectors like Energy and Financial.

YTD % RETURN

Major Market Indices

DOW JONES DOWN 7.89%
S&P 500 DOWN 5.17%
NASDAQ UP 4.79%

Sectors

PHLX Sox-Semi UP 19.91%
AMEX Network UP 7.31%
AMEX Comp Tech UP 12.46%
Amex Internet UP 24.78%
MSCO High Tech UP 17.72%
Amex Broker UP 11.23%
PHLX Oil Services UP 14.91%

PHLX Banking Down 23.71%
Amex Oil & Gas Down 8.91%
MSCO Cyclicals Down 5.11%

As you can see technology has far outperformed financials and Energy in general.

Stocks just had there best five week run since 1938, so a recovery is happening, but is this just a bounce in a bear market rally? I believe so, because what we saw happen in late 2007 and early 2008 was a huge seismic event that hammered the markets, I just cant believe that the worst is over yet. Will we see the lows? Perhaps, but unlikely. Will we see incremental highs from here? I don't envision it.

The recent mark up of equities had more to do with short sellers getting a little to cute with their exposure, not institutions allocating their cash. The biggest markups happened in sectors (Financials/Energy) that were heavily shorted, as well as rotation into Technology, as the earnings estimates/revisions have bottomed there.

I still like Tech to outperform the SPX moving forward. But the financials are clearly ahead of themselves after the Wells Fargo announcement which entirely is accounting driven. The hope for the financials is that earnings from Goldman (4/14), JP (4/16), and Citi (4/17), will mirror Wells. Guess what? They most probably will, and I do see some upside to stock prices in the very short term, although I would sell Goldman Sachs right here...right now, and go short Morgan Stanley in the process...More on this in a moment.

The financials are borrowing money at near zero and lending at much higher rates, so they will be profitable, and taking into account they will have lower write downs (FASB M2M) going forward has gotten some investors convinced that the worst is over. Heck...I would love to trade this yield curve currently. But what is worrisome is credit quality in their loan books. Most of the banks are still forecasting loan losses and taking provisions for these losses which take into account a better employment picture/economy moving forward. The banks are simply too optimistic with their loss reserve assumptions. Credit Card/HELOC loss trends are getting worse and will get worse before any turn around. We have not even tackled other structured product losses like Commercial Real Estate and Hybrid Securities.

Listen...The U.S. Treasury has already pumped almost $3 Trillion into the financial system, as well as backstopped 93% of all current bank balance sheet losses. Why would the banks not rally so viciously? The Geithner/Paulson scam will eclipse the Bernie Madoff scheme 10 fold before its all said and done. This is truly the greatest transfer of wealth from private taxpayers to the public sector ever in the history of our country. The bank executives will be more wealthy then ever after this is completed.

But what I am seeing is a serious divergence between financial stock price performance and actual credit trends. Credit trends have gotten worse while the PHLX Banking Index has risen almost 60%. This cant be ignored.

At the moment, market momentum and still fearful investors who have cash on the sidelines will prolong the rallies longevity, but there are clear signs that stocks are due for a pause. Take into account that 80% of stocks are trading above its 50 day moving average, and that the banks are trading 25% above its 50 day trend, this has not happened in 20 years, buying the market here thinking the worst is over just doesn't jive with the evidence presented.

I don't have to go into housing, homeowners are still feeling the pain of losing roughly 30% of the value of their homes. Even with mortgage rates very low, REFI activity strong, the housing picture is very slow moving, coupled with banks that are still not lending as they should. Home prices will correct another 15-20% before its over. Its simple supply and demand economics, no matter what the treasury is doing in the secondary mortgage market.

Not so Random Thoughts-

Goldman Sachs is reporting earnings tomorrow before the open. Look for a decent number but beware that the stock has doubled since its February low. This stock is screaming "sell me" ahead of its earnings. There are rumors that they will announce a huge secondary stock offering so they can pay back TARP.

Morgan Stanley has risen nicely as well this year, but most investors are predicting heavy losses to the tune of $1.6 Billion in their commercial real estate portfolio. This will contribute to a loss for the quarter, where analysts are predicting profits. Morgan Stanley made huge bets in commercial real estate when times are good, its going to difficult for the Moose to escape serious damage. The reason Goldman is posting gains is because their trading book is concentrated in equities, while Moose is concentrated in real estate.

JP Morgan and Citigroup are also posting earnings later this week. I say sell them when you can, not when you have to.