Banks, Nowhere To Go But Down?

Since early March, the impressive five-week rally in stocks has been driven largely by optimism that the financial industry is on the mend. And on Thursday JPMorgan became the latest bank to provide the rally with a tailwind when it reassured skeptical investors about the health of its balance sheet by reporting better-than-expected quarterly results.

But that’s not all. Chief Executive Jamie Dimon also surprised the Street pleasantly, when he said the bank has the ability to repay the $25 billion in TARP money it received back in October.

"That's probably the most positive thing any investor could hear," says Rob Lutts, chief investment officer of Cabot Money Management. That is, Lutts thinks it was a psychological boost for investors to hear the bank does not want government support.

The strong showing comes on the heels of impressive results from Goldman Sachs and word from Wells Fargo that it expects to post $3 billion in profit.

Considering the financials have rallied about 35% in the past month on upside surprises, can banks still wow the Street? For insights we turned to widely followed banking analyst Dick Bove, a strategist with Rochdale Securities.

Bove tells us he's broadly bullish on banks. That's because he thinks in the current environment banks can make a lot of money. "Deposits are flowing in and the margins on these companies are quite high. With mortgage rates so low there are tens of millions of mortgages that can be refinanced profitably."

But that’s not to say there aren't downside surprises lurking in the shadows.

JPMorgan also revealed in its earnings report that its credit card business had a loss of $547 million as delinquent loans soared and consumers spent less.

And Goldman said earlier in the week it would issue a $5 billion sale of common stock to help pay back the TARP funds. Not only does the move dilute shareholder value it triggers concerns that other banks may follow suit to be rid of onerous TARP restrictions.

What's the bottom line?

Although banks have run far and fast over the past month, their next move isn't necessarily down. There are reasons to believe the sector could continue to wow the Street and run even higher.

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Trader disclosure: On Apr. 16th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AAPL), (BAC), (EEM), (FCX), (GE), (RIG), (TCK); Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman's Firm Owns (UNH), (MSFT), (RIG), (PBR), (CSCO); Finerman's Firm Owns (WFC) Preferred; (C) Preferred; (BAC) Preferred; Finerman Owns (BAC) Preferred; Finerman's Firm Is Short (BAC), (WFC), (MDY), (SPY), (USO), (IWM), (IJR), (C); Najarian Owns (BX) Call Spread; Najarian Owns (PALM); Najarian Owns (RIO) Calls; Najarian owns (VAR) Call Spread; Najarian Owns (XHB) Call Spread; Najarian Owns (NTAP)

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