Four Reasons the Stress Tests On Banks Could Hurt Stocks

3. Will Anybody Believe the Test Results?

Along the same lines, confidence in government has been on a decided wane since Washington got involved with the credit crisis.

The botched public relations campaign and a feeling that the government is setting the bar too low regarding the tests has some worried that the results may not be taken seriously by investors.

"There's just a lot of concern, period, for anything the government does and how well thought through it is," says Kathy Boyle, president of Chapin Hill Advisors in New York. "Forcing everybody to take money solves that immediate crisis for moment, but all they did was delay the problem for six months."

Even those who believe the worst has passed for banks foresee skepticism from the stress tests.

"No matter what the government is going to do right now in regards to this test, somebody's going to be able to pick it apart," says Gary Hager, president of Integrated Wealth Management in Edison, N.J. "It doesn't seem to matter what the government does. It's second-guessed at all levels."

Hager is in the camp that the recent tumult over the stress tests is overheated and that the major banks will emerge fairly unscathed.

But that sentiment drives back the point of whether a report that shows the industry in relatively good health will have credibility.

"So much depends on the way the administration delivers the information," Krosby says. "You've got to wonder--are they going to point the finger at the weaker banks and allow a run on them?"

4. Stocks are Due to Fall, Anyway

In a market that is on a five-week tear higher, any bit of bad news could be a catalyst for a leg lower.

"When a market is due for a pullback they'll use any excuse to do that," Krosby says.

Should news break that a big bank came through the test poorly and will need to recapitalize--and thus be denied the ability to be aggressive in the marketplace--that could spur a selloff and drag the stock indexes lower.

Some point to the recent Goldman Sachs results in which the company easily beat Wall Street expectations but suffered losses to stock price. Investors worried after examining Goldman's numbers at whether the profit was built on solid ground.

JPMorgan Chase reported earnings Thursday that beat analyst estimates, while Citigroup reports Friday.

"If you get a day where there's news like Intel or Goldman where people look inside the numbers and question why they're doing what they're doing, I think you're going to run the risk of having a big selloff," Boyle says.

An attack on bank stocks would be sure to send the broader market lower.

"It's an important part of the puzzle. It's not the be-all and end-all but it's a very significant part of the mosaic and analysts are trying to piece together whether there's demand being created," Krosby adds. "Obviously, the financials are a key part of that puzzle. Without the financials stabilizing it's hard to see how we really pull out of this."

© 2012 CNBC.com

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