Dow's Rally May Signal False Sense of Security


After closing with losses for the third week out of the last four, the Dow Jones Industrial Average is soaring this morning. Up 171 points as of 11:30 a.m. EDT, the index is pushing forward as investors look ahead to tomorrow's Federal Open Markets Committee meeting. Speculation continues over the Fed's next move for its stimulus program, but may be starting to look on the bright side. Positive outlooks and some good news from the housing market are also helping the Dow's financial component stocks reclaim some of their big losses from last week.

Big Ben
Though we won't hear anything formally from Ben Bernanke until Wednesday, tomorrow's meeting is a big event for investors who have been tough at work trying to decipher economic news since Bernanke's last statements on the plans for continued stimulus. While it's been a tough job, the speculation has prepared some investors for what's to come, though today's big gains signal another story. As stocks soar higher, sentiment toward the Fed's approach to changes becomes clear -- it's not going to happen this week.

Be careful if you read too much into this morning's rally, though, since Mr. Market doesn't actually know what's going to happen in the FOMC meeting. And investors who are banking on the current levels of bond repurchases remaining the same this morning could be sorely disappointed as the week goes on.

Good start
After closing last week with some big losses, the Big Four banks are back in full gear this morning. Bank of America and JPMorgan may not be the biggest winners of the Dow components, but they're in the top 10. Both banks, along with Citigroup, were facing new international issues last week when Singapore officials announced a list of 20 banks that may have been involved in rate rigging, much like last year's LIBOR scandal. Though none of the banks have been officially implicated in the scheme, new scrutiny from various international authorities could bring more legal woes to the banks.

Some good news started off this week, though, as homebuilders' sentiment rose above the 50 mark for the first time since the recession began. This is great news for the housing market, which has seen both inventory of houses fall and prices rise. With new homes being built, banks can benefit in various ways: lending to construction firms, new mortgages, etc. And home prices have even driven the banks to hurry up and finalize a number of foreclosures -- allowing them to resell homes at higher values.

Though B of A doesn't have quite the hold on the mortgage market that it would like -- Wells Fargo and JPMorgan command the lead in new mortgage origination -- it is taking steps (like cross-selling) to expand its presence. So the continued success in the housing market could help its efforts to gain traction again.

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