A long-awaited reversal in the monumental global stock market rally since early March finally arrived last week. As the first-quarter earnings season started winding down and post stress-test capital-raising weighed on some banks, investors were faced with a slew of gloomy economic reports suggesting the recent optimism about a global recovery might have been premature.

“This week, the hard economic data remind us that the global recession is ongoing: exports remain deep in the red; retail sales disappoint; inflation still volatile on food and energy but down on year; and industrial production declines. However, the data are consistent with the story of a slowing economic decline, foretold by several ‘green shoot’ survey reports,” said Rebecca Wilder (News N Economics).

Source: Tom Toles, Washington Post.

“Less bad” economic reports provided investors with little comfort, sparking a reassessment

One trade I have been extremely bullish on is a long position on the KBW Bank Index [KBE: 18.71, 0.00 (0.00%)] while  shorting the KBW Regional Bank Index [KRE: 21.09, 0.00 (0.00%)].  This trade has worked out very well ever since I wrote on RealMoney’s Columnist Conversation with the trade.  The play is betting on the relative out-performance of the large cap banks compared to smaller regional banks.  The trade is unique in the sense that you are hedging your downside risk by shorting the Regional Bank Index, but profit when the spread widens.

In more detail, the KBE is an ETF of the 20 largest banking institutions in the U.S.  Players like Bank of America [BAC: 11.31, 0.00 (0.00%)], Wells Fargo [WFC: 25.69, 0.00 (0.00%)], J.P. Morgan, US Bancorp, and Bank of New York Mellon [BK: 28.44, 0.00 (0.00%)]

One of the definitions of “stress” offered by the Merriam-Webster dictionary is “bodily or mental tension resulting from factors that tend to alter an existent equilibrium”. Well, any bodily or mental tension investors might have been suffering from as a result of financial factors were shrugged off on Thursday with the announcement by US regulators that ten of the nation’s largest banks had to add a total of “only” $74.6 billion in equity following the completion of stress tests. However, whether this will indeed restore the equilibrium remains to be seen.

Source: Walt Handelsman

The diagram below, courtesy of the Financial Times, summarizes the stress test results in a nutshell. Click here or on the image below for a larger graphic.

Source: Financial Times

As investors welcomed the

The markets received a boost from the financial sector as investors awaited news on the government stress test. The DJIA was up 1.2% closing at 8512.28. The S&P 500 and NASDAQ 1.74% and 0.28% respectively. The 10 year saw yields shrink to 3.12% while real assets had mixed results as Gold ended up to settle at $911.9. Oil was down to $56.23 at the close of the NYMEX trading.

Walt Disney [DIS: 25.87, +2.72 (+11.75%)] helped the composites as it posted stellar first quarter earnings despite write downs and weak results from its movie and theme park segments. Disney reported a 46% drop in profit making $613 million compared to $1.13 billion during the same period last year. Disney saw revenues slip a meager 7% to $8.07 billion this past quarter. Write downs and restructuring costs came from radio licenses as well as investments in foreign media companies.

What a difference a day makes.  While just a day or two ago I was contemplating selling everything and going to cash—perhaps in my mattress—today I got back a bit of my usual bravado and tried a ‘trade’.

The market by the way closed today at 11,019.69, up 410.03, and the Nasdaq was up 100.25 at 2,199.10, and the S&P closed at 1,206.51, up 50.12 on the day.  Wow.  THAT was quite a bounce.

Anyhow, this afternoon as I was watching the market, all of the financials seemed ready to ‘roar’ ahead.  In fact, as this report relates, it was quite a move and it was the financials that provided the engine for the move:
“Sept. 18 (Bloomberg) — U.S. stocks rallied the most in six years on prospects the government will formulate a …