As hopes rise, altitude sickness sets in for some stock bulls

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Have those economic ‘green shoots’ already grown into a rose garden? So soon?

Stocks today surged worldwide after the government wrapped up its ‘stress tests’ of major banks, and on news that net U.S. job losses in April were smaller than expected (though still huge, at 539,000).

Investors who wouldn’t go within two miles of a bank stock a week ago today found them irresistible.

Case in point: PNC Financial, the big Pittsburgh-based lender. Last week the stock plunged 12.5% as some investors backed away ahead of the stress-test results.

Today, after regulators ordered PNC to raise a relatively modest $600 million in fresh capital, the stock rocketed $8.61, or 19%, to $53.08. Its gain for the week: 40%.

How could the market get it so wrong on PNC last week? Or is it getting it wrong this week?

On the heels of the stress test results, all 24 bank stocks in the BKX index of major lenders rose today. The index jumped 12% and was up 36% for the week.

The rebound in the banks has the scent of ‘short covering’ by bearish traders, but that can’t explain it all. There is, of course, legitimate optimism in the stock market as economic data continue to come in better than expected -- or at least, less worse than feared.

The employment data suggest that ‘the economic downturn has hit bottom and the recession is all but over if it is not over already,’ said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York.

If he’s right, the stock market has done its job: The spectacular rally since March 9 has told us that the world wasn’t ending, even though, early on, few investors believed it.

The Dow industrial average rose 164.80 points, or 2%, to 8,574.60 today, bringing its gain for the week to 4.4% and its gain since the 12-year low on March 9 to 31%.

The broader Standard & Poor’s 500, up 2.4% today, has surged 37% since March 9.

The story is much the same, or better, around the globe. Measured from their March lows, the German market is up 34%, Brazil is up 42% and Hong Kong is up 53%.

True, stocks remain far below their record highs of 2007. Even so, for some bulls, altitude sickness is beginning to set in.

‘I’m actually getting nervous here,’ said Larry Adam, investment strategist at Deutsche Bank Private Wealth Management in Baltimore. ‘I think we’ve come too far, too fast.’

Steve Hochberg, chief market analyst at Elliott Wave International in Gainesville, Ga., was pounding the table for stocks in early March, predicting a ‘huge bear-market’ rally -- in other words, a short-term rebound, but a big one.

Now, he believes the rally is ‘maturing.’ He notes that a daily Wall Street poll of short-term traders shows 80% are bullish, which he says is ‘the most extreme reading since October 2007’ -- the month the market peaked.

Yet even those analysts who are advising caution concede that they may be too early. What we don’t know is how many investors and traders remain poised to rush into stocks after even a modest pullback.

With 2009 and 2010 corporate earnings just a huge double question mark given uncertainty about the economy, it’s sheer emotion, not fundamentals, that is driving the market.

And in that kind of environment, anything can happen . . . and probably will.

-- Tom Petruno