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This Rally Will Be Tested Tomorrow

There is generally good news today. The soft news is that President Obama has acquitted himself well in his first real foray onto the international stage, including a press conference where he simply charmed reporters.

But the hard news is good as well:

1) The FASB rule changes on fair value accounting, while controversial, will help bank profits. Indeed, bank credit default swap spreads narrowed significantly in the morning.

2) The commodity rally has continued on the reflation trade, with most big names at 6-week highs or better.

3) Technicals are strong, as the S&P 500 passes its March 26th rally highs and the Dow Transports, the classic proxy for the economy, is up 9 percent, it's best one day showing since 1939 (!).

The bad news is it is likely that nonfarm payrolls will likely be worse than expected; that will be the first test of this leg of the rally.

Bank stocks: is the rally real? Bank stocks hit their highs shortly after the markets opened and were notably weaker midday, but have since come off their lows.

They weakened again shortly after 1 PM ET on word the U.S. Senate approved a provision requiring the Federal Reserve to disclose the names of institutions it has provided funding to.

Several names—including Morgan Stanley—have been negative for most of the day. Most traders agree that the whole environment over executive compensation has become so poisonous that anyone who can will repay TARP money as soon as possible, even if it means raising capital.

The question, of course, is whether Treasury will allow "systemically important" banks to return the money. Four smaller banks have already returned TARP money.

Beyond that, there remains a strong bearish sentiment on bank stocks. Meredith Whitney, in a note yesterday to clients, noted that bank stocks may indeed continue their rally into April, due partly to changes in mark-to-market and one-time tax gains. She advises clients not to get caught short, but then cautions: "It remains clear to us that core liquidity fundamentals are deteriorating at an accelerated pace."

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