The five-week stock market rally accelerated on Thursday when Wells Fargo (WFC) preannounced 55 cents a share for Q1 earnings versus an expected 24 cents a share. Its earnings weren’t expected to be reported until April 22, and the pre-announcement was apparently made to offset the many recent negative comments and reports about the banks from Wall Street’s analysts.
Well Fargo’s announcement resulted in the bank’s stock jumping 32%. And a New York Times report that the 19 banks undergoing government stress tests will pass them brought another rush of buying into those stocks and the sector. The KBW Banking Index climbed 20.1%.
According to The Wall Street Journal, the timing of the Wells Fargo pre-announcement came after short positions in Well Fargo and Bank of America (BAC) climbed sharply during the preceding week. It reported that its source, Data Explorers, said that WFC increased its short position from 2.7% to 3% during that period.
With the rally in the financial stocks, investors seemed to ignore the weaker-than-expected sales from Wal-Mart Stores (WMT). The giant retailer had positive March same-store sales but they were not as strong as expected.
At the close the Dow Jones Industrial Average (DJI) had gained 246 points to 8,083, the S&P 500 (SPX) gained 31 points to 857, and the Nasdaq (NASD) rose 62 points to close at 1,653.
The New York Stock Exchange traded 1.8 billion shares with advancers ahead of decliners by 9-to-1, and on the Nasdaq 750 million shares traded with advancers there ahead by 5-to-1.
The May crude oil contract rose $2.86 to $52.24 a barrel, and the Amex Energy SPDR (XLE) rose $1.30 to $45.60.
Gold retreated on the Wells Fargo news with the April contract off $2.60 to $882.20 an ounce. The PHLX Gold/Silver Index (XAU) fell 59 cents to $122.76.
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What the Markets Are Saying
On Thursday, the short-sellers took a beating as a result of a somewhat contrived earnings pre-announcement by Wells Fargo (WFC) designed to catch the shorts “with their pants down,” according to The Wall Street Journal. And that “short squeeze” drove many of them out of the market in just one trading session.
But with potential short sellers, who must cover some time, now out of play, the banks and other financial stocks might be more vulnerable than ever to price declines resulting from earnings disappointments or other unfavorable news.
So, in an attempt to manipulate the market and their stocks, they may have done themselves and the investing public a disservice by making them more vulnerable than ever to a serious round of selling.
Further, this sort of “monkeying around” with dates of earnings releases leaves the investor with more doubts about the fairness of the trading system.
The top management of the financial stocks have already come under sharp criticism for their self-serving ways and just because this “pre-announcement” was aimed at their unpopular adversaries, the short sellers, is no reason for regulators to ignore the bad conduct.
It will be interesting to see if the buying continues today or if Thursday turns out to be the final thrust of the bear-market correction. If you’re a trader, for now it would be best to stand aside and let the dust settle, but you should be primed to re-enter on the sell side when the reversal occurs.
Stay tuned, this battle is getting even hotter and some of the big financial stocks will be reporting later this week, which will focus more on the nature of their earnings.
Today’s Trading Landscape
Only two earnings reports are expected: Bank of the Ozarks and Talbots. No major economic indicators are scheduled for today.
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