Earlier this week it sure looked like the financial sky was falling. Soothing words from Fed Chairman Bernanke seemed to be a daily occurence and everyone wondered would the banking and mortgage world as we knew it suddenly come to a screeching halt.
Then, just as Bernanke was clearing his throat to answer senators' questions, an interesting thing occurred. In the span of just a few minutes, oil prices plummeted, the dollar shot up and stocks started to rebound. No one is saying (at least publicly) that there was a concerted effort to intervene in the markets, but it sure had the feel of one.
Oil prices tumbled below $130 a barrel for the first time in more than a month Thursday, as crude's dramatic slide entered a third day accompanied by a sharp sell-off in natural gas.
The declines accelerated amid growing concerns that the weakening economy and creeping inflation are eroding demand for fossil fuels in the U.S. and other large energy-consuming nations.
Oil is now more than 10 percent cheaper per barrel than it was on Monday; natural gas prices are down more than 20 percent just since the Fourth of July. Still, experts are not convinced that prices have turned a corner.
"There's no bell that tells you when the market has turned," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.
Market sentiment has since become much more positive now that several banks have reported their second-quarter results. US Bancorp (NYSE:USB) kicked things off with good, but not outstanding, numbers.
They were followed by Wells Fargo (NYSE:WFC) which not only reported excellent numbers but went a step further by hiking their dividend. Today we heard from J.P. Morgan Chase (NYSE:JPM) which beat expectations on both its top and bottom line numbers.
Keep in mind that more write-offs will no doubt be reported from the banking sector in the coming quarters. But bank and broker/deal borrowings from the Fed are lighter now than they were in March. The housing sector, meanwhile, hasn't materially deteriorated in the last several months.
We may not have seen the bottom in the banking sector just yet, but with the group trading at less than 10 times earnings, the downside risk is probably quite limited.
That said, the rally that was sparked in part by the turnaround in banking shares hasn't been all that impressive: Volume has been somewhat light and the advance/decline data hasn't been overwhelmingly bullish. That's not the kind of action we would expect if we were at the early stage of a major upward move.
Our guess as to how far this rally will go? If crude oil continues to correct--something we think is quite likely--stocks could stage a rally of between 5 to 10 percent before running out of steam. If oil doesn't correct further, this rally might turn from a miracle to a mackerel.
