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Stress Tests Bring the Pullback


But tech earnings reports may move those stocks higher.

This could be the start of the pullback. We have a "less than perfect" report from Bank of America (BAC) and what looks like a terrible decision by the government on TARP conversions to equity. How deep and long the pullback lasts is an open question, but the fact that we wake to ugly futures on a merger Monday story should be something to pay attention to.

Moreover, the stress tests will create angst for days and weeks to come. In fact, I think most of whatever downside we get this week will be driven by stress-test angst, and I'm thinking this will get traction through the week. The bears are still very liquid.

Call me lucky, good, or both, but I sold out of Wells Fargo (WFC) late last week as well as half my Morgan Stanley (MS) into the last couple hours on Friday. However, I also think any material weakness in Goldman Sachs (GS), Morgan Stanley and JPMorgan (JPM) (or any top bank that has paid back or wants to pay back TARP immediately) can be bought and I will be looking for levels to do just that.

Interestingly, I think that some of the banks considered to be the "most at risk" to these stress tests might pass quite well. BAC and Citigroup (C) may come through these tests look fine. And ultimately I view the risk of the government taking these seemingly very aggressive actions on equity conversions to be remote.

Frankly, I'll believe it when I see it but I will respect the action until we see the stress test results. The aim of our leaders is to create stability in the banking system and this action would completely unwind that stability.

While I certainly could be wrong on this, the main reason I view this scenario as unlikely is due to the make-up of the Senate. I think the idea of aggressive equity stakes and its immediate effect on banking stability will be viewed quite unfavorably by the Blue Dog Democrats who now wield quite a bit of power behind the scenes as well as the bulk of the GOP.

Moving on to the tech (or sunny) side of the street, I think we may see some strong upside as well as market differentiation on strong reports. Even though the market has shrugged off solid results thus far, I think we now can start seeing upside if companies report like F5 Networks (FFIV), Google (GOOG) and Juniper (JNPR) did.

I like the Oracle (ORCL) deal, and I buzzed last Friday that Microsoft (MSFT) needs to be more like ORCL and IBM (IBM). ORCL is buying Sun Microsystems (JAVA) for a great price, and would look to own some ORCL at any price under $16.50 -- I have ORCL being worth $22 with relative ease on continued market strength while having low beta to the downside.

IBM reports tonight; I think it will be quite good. In fact, if we get a Dow down 250 day, I may take a stab at some IBM ahead of the report.

Bottom line, we're due for a pullback, and this stress test angst will provide the fuel for that. However, I now think the reports like GOOG will now start to move stocks higher. For the brave we will also get a few bank flushes to buy into. Personally, I'll stick with my short list above. Apple (AAPL) reports later this week, and that will be a good test of my theory.
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Position in MS, GOOG, AAPL, JNPR

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