Chatter about whether the financials will derail the bulls prevailed on Thursday after the Bank ETF tumbled sharply despite an otherwise sideways S&P.
Investors ran for the exits in BofA, JPMorgan, and other big banks after all 50 U.S. states launched a joint probe into potentially illegal foreclosures.
The investigation will focus on allegations that some banks did not review documents properly or submitted false statements to evict delinquent borrowers.
Investors worry that an extended investigation could weigh on bank earnings.
"This is a potential cost to factor into long-term profitability," says Jefferson Harralson, a bank analyst at Keefe, Bruyette & Woods in a Reuters interview. "Banks could be dealing with this on a loan-by-loan basis for years."
Can the rally continue without the banks?
Instant Insights with the Fast Money traders
The rally can continue without the financials, explains Steve Grasso. As long as they move laterally the broad market can still move higher.
But -- if financials start to cave that’s different, he says. Should that happen the S&P could quickly trade down to 1130. Personally, I suspect the next leg is lower.
I also expect in the near-term banks will pull to the downside against an otherwise strong market, adds Jon Najarian. Looking at technicals the XLF continues to fail at $15 – the 200-day. If the financials keep going down the market won’t be able to fight that.
I really don’t think we can have a meaningful rally without the banks stocks, adds Guy Adami. We may have seen the high in the S&P for a while.
I also do not believe that the market can rally without the bank stocks, says Steve Cortes. This chasm can not sustain – I think banks drag the whole market lower. And I believe the worst name in the space is BofA.
Adding to the headwinds the recent rally was largely due to QE2 expectations, but I think they're overdone, adds Cortes. Consent in the Fed is not unanimous. And the Fed is a political animal – we’re likely looking at a Republican Congress that would frown on a very weak dollar. I think QE2 is tepid and disappoints.
A few months back we told you about the 'death cross,' and now we bring your attention to the promising 'golden cross,' when the S&P's 50 day moving average breaks above the 200 day.
According to Strategas Research, typically the S&P climbs over 7 percent in the year following this cross.
What's the takeaway?
We had a death cross a while back and the market shot higher, reminds Guy Adami, so I can’t get all bulled up on the golden cross.
Click here to go to "S&P in Grips Of Death Cross?" written on July 1st
M&A TRADE: SEARCHING FOR A DEAL?
Shares of Yahoo! spiked Thursday after the Wall Street Journal reported a group of private equity firms may bid for the Web company.
Specifically the paper reported that Silver Lake Partners and Blackstone Group LP are exploring a bid in conjunction with AOL. The report also said Yahoo hasn't been involved in the talks yet.
Both AOL and Yahoo have declined to comment.
What’s the takeaway?
Find out what Jon Najarian has to say about M&A. Click here to go to “Jon Najarian: 4 Possible M&A Ways To Play”
SCHOOL OF HARD KNOCKS
More pain for the school stocks on Thursday after a slew of analysts took down their numbers on Apollo after the company pulled its 2011 outlook given the uncertain regulatory environment.
Hear from one such analyst, RBC's Bob Wettenhall. Watch the video above!
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Trader disclosure: On Oct.14, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Cortes is short (BAC); Cortes is short (BIDU); Cortes is short the U.K. Pound; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)
For Steve Grasso:
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (OPEN)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners are short (QQQQ)
For Mark Mahaney
Citigroup owns 1% or more of (YHOO), (AKAM), (NFLX)
Citigroup makes a market in (GOOG), (AMZN), (PCLN), (YHOO), (AKAM), (NFLX), (OPEN)
In the past 12 Months, Citigroup acted as manager or co-manager of (PCLN) and has received investment banking compensation
Citigroup provided non-investment banking services and received compensation from (GOOG), (AMZN), (YHOO) in the past 12 months
For Robert Wetenhall
CNBC.com with wires.