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After Yesterday's Rocket Ride - Today's No Surprise

Today's action is perhaps not surprising. It was encouraging for most of the day because even though stocks were weak at the outset, there was no concerted selling effort, despite yesterday's huge rally. However, in the final hour stocks, notably financials, did move down. Several banks ending down mid single-digits.

A consistent sign of seller exhaustion would be the most positive technical bulls could get.

Can the rally hold? It depends upon:

1) The earnings outlook, and

2) The success of government plans.

On the earnings outlook, the current consensus is that Q1 results & Q2 guidance will be downbeat & below expectations.

BEARS are positioning to sell into the April earnings reports. They believe that the global stimulus programs will be ineffective, and that global wealth destruction has been too great to turn the markets around so soon.

BULLS believe that the market will seize on any piece of positive commentary, and that the selloffs on lower earnings guidance will not be as severe as bears believe because the market has already priced in bad first half and lower second half earnings.

As for government plans, we need answers to two questions:

1) How will the government get banks to sell impaired assets? According to Credit Suisse, 80 percent of most bank assets are loans that are not marked to market, so selling those loans at a discount would notably lower capital levels. Why should a bank sell?

About twenty percent of the capital of most banks are securities, which have been marked to market. Here, banks could definitely improve their tangible common equity ratios if they sell securities that are marked to market, "assuming the bids come in at material premiums to balance sheet marks," as Credit Suisse noted.

2) How much more capital will banks be forced to raise? The "stress test" for banks will not be done until the end of April, and those that do not pass it presumably will be under more pressure to raise capital.

Bottom line: if bank soundness is one of the two keys to the market, there are still more questions that need to be answered before traders feel confident.

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