How Real Is This Rally?

It's a broad rally today—many sub-sectors are up in the high single digits: banks, materials, energy, retailers. semis.

This is more than a short covering rally, but it's not clear how real it is.

It seems that much of the buying is coming from trading accounts—hedge funds—chasing oversold conditions. Problem is these types of traders can reverse their positions just as easily.

I'd be a lot more comfortable if big institutional players and mutual funds were buyers, but I am not hearing that yet.

Some hope for banks is the motivating factor in the rally.

Mr. Pandit's comments that Citi was profitable in the first two months of 2009, echoing similar comments from Wells Fargo on Friday, is the primary catalyst.

Traders like this talk, but are not surprised. Remember, banks are borrowing money from the government for essentially NOTHING, and lending it out for...more than nothing. Who can't make money on that trade?

But bad assets are not having a good quarter. There were huge writedowns at the end of last quarter; there will likely be more huge writedowns at the end of this quarter.

That's why the focus of the debate is now over the Obama bank plan, the outlines of which are now pretty clear. The Obama administration will encourage (demand?) banks take large losses on their bad loans. They will set up a public/private partnership that will provide low-cost loans to buyers of those distressed assets.

The Street likes this idea much more than the government buying loans directly. The less direct ownership by the government the better.

The question, of course, is how many banks will bite the bullet, take the losses, and sell the assets, rather than just holding on and hoping prices will improve.

That is the next stage of the debate.

• Citigroup Sparks Big Rally, But Pros Are Skeptical

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• The Dow 30 in Real Time
• The CNBC Stock Blog

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