Was the spring rally in financial stocks just a big fakeout?

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Nobody likes to be taken for a sucker. And that’s what it feels like to a lot of investors who bought bank and brokerage stocks after the financial system’s near-meltdown in mid-March.

The move back into the financial issues worked for a while. But many of the stocks have slumped again in recent weeks. The sell-off worsened early this week on fears that brokerage Lehman Bros. would be the next high-profile victim of the ongoing credit crunch.

Even amid a broad market rally on Thursday, many financial issues struggled. Bank of America Corp. closed unchanged at $31.99, its lowest since 2002. Merrill Lynch & Co. edged up just 19 cents to $40.96.

And Washington Mutual Inc. slipped to a new multiyear low, off 7 cents to $8.61. As recently as April 7 WaMu traded as high as $13.15. Whoever paid that price now is wondering what he or she was thinking.

Here’s what some investors were thinking, plain and simple: ‘I can’t afford to miss the turn in the financial sector.’

Given how beaten-up the stocks were in winter, the widespread assumption was that there must be many bargains out there. Trigger fingers got itchy the last couple of months.

‘The call of the decade will be when to get into financial stocks,’ says Richard Weiss, who manages $12 billion as chief investment officer for City National Asset Management in Beverly Hills. But unlike some other investors, Weiss says he hasn’t yet been tempted.

Neither is Joe Battipaglia, chief investment officer at brokerage Stifel Nicolaus & Co. in Florham Park, N.J. ‘It’s still too early,’ he says.

Investors who are staying on the sidelines point to the pace at which troubled loans are rising in the banking system, particularly for construction and development loans, a big credit category for many banks large and small. The delinquency rate for those loans soared to 7.18% in the first quarter from 5.03% in the fourth quarter, according to the Federal Deposit Insurance Corp.

As for the big brokerages and investment banks, Battipaglia believes investors still haven’t come to terms with the threat to the companies’ earnings growth for the next couple of years. The firms used massive amounts of borrowed money to juice their results in the last few years. Now, deleveraging is the order of the day -- and that has to mean less earnings power.

Given that reality, and the potential for heavy shareholder dilution as the companies raise fresh capital to cover investment losses, ‘I can’t make the case to go into these stocks,’ Battipaglia said.

Lately, more investors have been coming over -- or back -- to his point of view.