A ‘garbage rally’ in stocks? It’s that, and much more

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Revenge of the reviled: The biggest money-makers by far in this year’s surprising stock market rally have been the shares of America’s most maligned companies -- the banks.

The BKX index of 24 major and regional bank shares was up 34% year to date through Wednesday, almost four times the 8.6% gain of the Standard & Poor’s 500 index.

In part, the bank stocks have been attracting buyers who were looking for shares that had stalled out late last year. The BKX index tumbled 9.5% in the fourth quarter while the broader market continued to rise.

Some investors also have been betting on robust first-quarter earnings for financial firms, thanks to Wall Street’s comeback and the Federal Reserve’s decision to keep short-term funding costs at rock-bottom. JPMorgan Chase’s profit report on Wednesday had to thrill those bank-stock bulls.

But the latest streak in bank shares has just fed the contempt of market bears who see this year’s advance as a ‘garbage rally’ -- a surge led by the ugly and the undeserving.

Another case in point, they say: the jump in so-called microcap stocks, the smallest of small-company shares. The Russell index of 1,537 microcap issues was up 17.9% year-to-date through Wednesday, compared with a 15.5% rise in the Russell 2,000 small-stock index.

Thinly traded microcap stocks are, of course, extremely speculative -- and a cinch for traders to manipulate. So it’s easy to view the sector’s recent spike (the Russell microcap index is up 9% just since March 19) as a sign of market excess, suggesting that the rally is about to flame out.

But Satya Pradhuman, founder of small-stock research firm Cirrus Research, says investors’ interest in microcaps also has a fundamental underpinning: If the economic recovery rolls on, the smallest companies are likely to be major beneficiaries of any loosening of credit by the banks.

For investors, “The biggest bang for the buck is in smaller companies as credit opens up,” Pradhuman said.

Whatever else negative the bears can say about this market (they mock its low trading volume, for one), the advance this year has been broad-based, as the accompanying chart shows. And that typically is a sign of strength rather than weakness.

“They’re buying a whole lot of different stocks,” said Jon Najarian, a veteran trader and co-founder of optionmonster.com.

On Wednesday, 151 of the S&P 500 stocks hit new 52-week highs, the largest number yet in the new bull market, according to Bespoke Investment Group. The growing list of new highs “provides positive confirmation of the rally,” Bespoke said.

But the firm added the caveat you’ll hear these days from even the most confident bulls: “It can certainly be argued that the market is overdue for at least a breather.”

-- Tom Petruno