Crunch Time for Financial Rally

Is there any doubt that big-cap financials are the key to this market?

What's worked for two months? Sell the rally in financials. This is crunch time for the two-day rally...and not surprisingly, they are pushing the old trade hard today.

The two most important stocks are Citi and Merrill . Citi had a loss, but better than expected, and since the fourth quarter they have progressively cut the losses in half (from a loss of $1.99 to a loss of $1.02 to a loss of $0.49). Bad by historic standards, but a steady improvement.

Merrill took bigger writedowns than expected, a bigger loss than expected, and already bulls are arguing that this is another "kitchen sink" quarter for the company (they said that last quarter). Still, the overall numbers are still so weak it's hard to argue for any kind of rally here.

What is likely to happen here is a bifurcation of financials: those that are considered the best-managed, lowest-risk, like JP Morgan , will outperform the others, and this is how it should be. But this time, they may outperform by a wide margin.

Already, regional banks like Huntington Banc shares , Zion , Fifth Third are back to their Sell on Rally mode, down 5-9 percent. However, brokers are clearly looking to hold their gains, Merrill is trying to go positive, and Lehman is up nearly 5 percent.

Finally, I don't want to act like I'm ignoring tech. There are problems here. I won't do fundamentals, I'll make it simpler. Consider that:

1) tech was considered a safe haven;

2) tech is now the largest sector of the S&P 500 (16.4 percent);

3) Google and Microsoft make up about 18% of the tech index.

Questions? Comments?