What's Behind The Weakness

Stocks are weaker, led by profit-taking in financials, which was the market leader last week.

This makes sense, since the Bank Index (BKX) is up 30 percent since the summer rally began in the second week of July.

In addition, Rochdale's Dick Bove sent out a note to his clients saying that banks stocks were "trading on fumes" and that investors should take short-term profits.

He noted that the recent bank stock rally was driven by a change in psychology, not the near-term earnings outlook. He gave the following brief survey:

1) In the fall of 2008, it was widely believed the banking industry was insolvent; bank stocks were valued "on a liquidation basis." Industry worth, according to Bove's calculation: $860 billion.

2) In the spring of 2009, this view was abandoned, as traders believed the banks would survive, and should be valued "on some multiple of normalized earnings." Industry worth: $2.0 trillion.

3) In the summer of 2009, valuation metrics were changed again, and banks should be worth 10 to 12 times pre-tax, pre-provision earnings. Industry worth: $3.3 trillion.

Bove believes that bank earnings will not improve in the third or fourth quarter and that "the rational investor would step away from psychology at this point and take some profits. I suggest this even though I am not changing the long-term buy ratings on my favorite stocks."



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