Banks Rally, but Demons Still in Vault; Interbank Lending, House Prices Suggest the Worst Isn't Over; a Bear Bounce?
Every few months since the credit crisis began a year ago, bank stocks have rallied on hopes that the worst is over. They did it again, loudly, a few days ago. But there are signs that it may be too soon to sound the all-clear.</br></br>The rebound this time was impressive. From their July 15 low through Wednesday, U.S. bank stocks surged 45% according to the Dow Jones Wilshire bank index. Even after giving back some gains late in the week, the prices of some financial stocks have doubled from their July lows. Still, the hardest-hit, such as Washington Mutual, National City and Fannie Mae, remain down 80% or more from their 2007 highs.</br></br>These sudden surges typically happen when stocks have fallen so drastically that short-term investors see the opportunity to cash in on a bounce. A government move to clamp down on short-selling, making it harder for investors to bet on stock declines, was a big catalyst for the recovery this time.</br></br>If longer-term investors decide the worst is over and start buying, this sudden recovery can mark the end of a bear market. If the longer- term investors stay away, the stock bounce turns out to be a bear- market rally, and stocks retrace their steps.</br></br>Each of the rebounds up to now ran out of steam and led to new lows. Some worry that the latest rally was running out of steam at last week's end. Considering how powerful the rally was, if some of the big rebounders, such as Fannie Mae and Freddie Mac, were to fall back to their recent lows, they would lose half their current value or close to it -- a big hit for anyone who bought last week.