Bank bears flee as the stocks soar ahead of ‘stress’ results

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If the torrent of leaks on the big-bank ‘stress tests’ was aimed at somehow hurting the banks, it has had the complete opposite effect.

If the leaks were meant to skewer traders who have ‘shorted’ bank shares -- betting on lower prices -- they’ve worked beautifully.

Bank stocks rocketed today on the latest stress-test rumors, in what many analysts described as a massive short-covering rally: Traders who had borrowed bank shares and sold them, expecting the stocks to plunge again, were rushing to buy and close out their trades as prices surged.

‘They’re taking the shorts out feet first,’ said Jon Najarian, co-founder of trading firm TradeMonster in Chicago.

Overnight, it looked like Bank of America Corp. would lead a sell-off in bank shares today, on media reports that BofA would need to address a capital shortfall of up to $35 billion when the government announces stress-test results on Thursday.

Instead, BofA soared $1.85, or 17%, to $12.69, bringing its three-day advance to 46%.

The market already knew that the government wasn’t going to allow any of the major banks to fail. Now the verdict seems to be that, whatever the institutions have to do to bolster their capital, it won’t result in the kind of stock dilution that would warrant another crash in the common share prices.

Naturally, the banks rumored to be healthy enough not to need more capital also were up big-time today -- including JPMorgan Chase, up $2.40, or 7%, to $37.22; and Bank of New York Mellon, up $3.05, or 11%, to $30.46.

Trading volume in the bank stocks was heavy, another sign of capitulation by the bears, Najarian said.

BofA traded 920 million shares, up from 551 million on Tuesday. And trading in BofA call options (bets on a rising stock price) also soared, Najarian said.

Wells Fargo & Co., which surged $3.62, or nearly 16%, to $26.84, traded 256 million shares, more than double last week’s daily average.

Citigroup jumped 55 cents, or 17%, to $3.86 on volume of 862 million shares.

For a taste of what has happened to the short sellers, check out the Direxion Shares Financial Bear exchange-traded fund, which is a bet on falling financial-stock prices. The fund dived 20% to a new low of $5.24 today.

-- Tom Petruno