Market Review - Bulls For July 23

By Ayton MacEachern | July 23, 2008 AAA

It was only a couple of weeks ago that the markets had fallen into bear market territory, defined as a fall of more than 20%. But the major indexes have come back off of their recent lows; the S&P 500 finished yesterday at 1,277 to bring it up to only a 19% drop from its 52 week high of 1,576. The Dow, closed at 11,603 yesterday, and the Nasdaq closed at 2,304, both of them are also down about 19% from their highs in the last 52 weeks of 14,280 and 2,862 respectively. (To learn more about bear markets and how to make it through them in one piece, read our related article Surviving Bear Country.)

In the last 10 days of trading, the markets have seen some of the biggest gains in months. The Dow is leading the pack, posting 4% gains, with the Nasdaq close behind with 10-day trading gains of 3%. The S&P 500 is lagging a bit behind with a 10-day gain of just 1%, however it was still enough to pull it out of bear market territory.

To take a closer look at why the markets have come up so much in such a short period of time, it is important to look at the sector weightings. Financial services is one of the largest sectors on these indexes. The Dow composed of almost 13% financials. The S&P 500 is even higher; financials are its largest sector at close to 20%. The Nasdaq Composite tops this figure at whopping 22%. (For more on the various sectors, read Sector Rotation: The Essentials.)

Here are five financial companies that are each part of at least one of these indexes. All of these companies have provided investors with extraordinary gains over the past week.

Company One Week Gain* Component
of Index
Provident Bankshares
(Nasdaq:PBKS)
111% Nasdaq Composite
Fannie Mae
(NYSE:FNM)
90% S&P 500
Wachovia
(NYSE:WB)
85% S&P 500
Bank of America
(NYSE:BAC)
75% S&P 500
Regions Financial
(NYSE:RF)
66% S&P 500
*Data as of market close July 22, 2008


Bank of America Eliminates S&P's Bear Problem

As mentioned above, the S&P 500 has added about 1% over the past two weeks of trading to bring it out of bear market territory. This doesn't seem much, but annualized that is quite a return. When you see 75% gains in one week by Bank of America (NYSE:BAC), the sixth-largest component of the S&P 500, this isn't overly surprising. What is surprising is how Bank of America managed to come up so much in such a short period of time. The bank added about $80 billion in market capitalization in just one week (Calculated based on shares outstanding of 4.45 billion)! This now makes it the largest financial institution with a market cap of $145 billion, overtaking JPMorgan Chase (NYSE:JPM) with $140 billion.

Quarterly earnings were released on Monday, with the profits coming in 44% lower than the previous year's period. This may seem like bad news, but the earnings of 72 cents per share were higher than the 53 cents that was expected, creating a 36% surprise. It was enough to send prices up about 10% on Monday, adding fuel to an already blazing fire. More good news came when Wall Street learned that most of the bank's earnings came from its segments out of reach of the U.S. housing market. Investment banking, corporate banking, wealth and investment management together, brought in over $2 billion, over two-thirds of total net income.

With recent run-ups, the shares of Bank of America have become a bit pricey, especially since we are not all completely sure that the last shoe has dropped in the financial sector. This recent run-up in the financials has provided a bit of hope that we may be nearing the end. I am still comfortable waiting on the sidelines to see the real estate markets strengthen before jumping in to catch the bottom. Again, we will continue to revisit the financials as the days progress.

Add Your Two Cents
What do you think will happen with Bank of America going forward? Will the better than expected earnings, and slow removal from the suffering credit markets, be enough to create a bottom in this stock and the sector in general? Be sure to join me (aytonmm) in the FREE Stock Picking Community to share your thoughts and see what other investors are saying.

To learn why the market is in this position, be sure to check out CDOs And The Mortgage Market.

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