Bustling Bank Stocks Lift Market

Updated from 4:07 pm. EDT

Stocks in the U.S. blasted higher Tuesday as investors bet that the world's biggest banks are finally nearing the end of the mammoth writedowns that have plagued financial markets since last year.

The Dow Jones Industrial Average barely let up today, surging 393.91 points, or 3.2%, to finish at 12,656.80 -- only 3 points off the day's high. The S&P 500 vaulted by 47.48 points, or 3.6%, to 1370.18, and the Nasdaq Composite jumped 83.65 points, or 3.7%, to 2362.75.

Breadth was positive. Around 4.75 billion shares changed hands on the New York Stock Exchange, with advancers outpacing decliners by a 4-to-1 margin. Volume on the Nasdaq reached roughly 2.16 billion as winners beat losers 7 to 2.

"What better way to start a new quarter after two lousy ones?" said Steven Sheldon, CFA and principal with SMS Capital Capital Management. "I think there's probably some hopeful buying going on today, that maybe we're finally due for a decent run here, or at least that the worst is behind us."

Owen Fitzpatrick, head of equity strategy with Deutsche Bank Private Wealth Management, pointed out that money managers could be positioning themselves ahead of an expected recovery. "Whether today is a head-fake or not, we will see, but at some point it'll become real. There are a lot of reasons why equities should recover from their lows at year-end," he said.

The beginning of the second quarter saw more financial names predicting they will write down large swaths of bad assets. UBS (UBS Quote) announced that it will write off $19 billion for the first quarter and take a loss of $11.94 billion. The Swiss bank also said it will raise money by selling $15.1 billion in new shares and that Chairman Marcel Ospel will step down and be replaced by Peter Kurer.

Still, said Fitzpatrick, "I think people are getting comfortable that maybe the peak of the writeoffs is approaching, that maybe this is the quarter where we see the proverbial kitchen sink thrown in."

Richard Yamarone, chief economist with Argus Research, remained cautious. "It would be great if that comes true," he said. "It's almost, 'Ding dong, the witch is dead, nothing but blue skies ahead.' And I hope that's the case. But hope is an emotion; it's not a strategy, so I would be cautious here. I would accept it as a potential turning point."

As investors nursed those hopes, UBS shares ramped up 14.6%. The stock also got an upgrade to buy from hold at Deutsche Bank, and a JPMorgan analyst suggested that the company is trying to leave its subprime woes behind in order to focus on core operations.

Deutsche Bank (DB Quote) itself, meanwhile, rose 4.2% despite pegging its first-quarter writedowns at $4 billion.

Similarly, both Citigroup (C Quote) and Merrill Lynch (MER Quote) spiked even though Goldman Sachs cut bottom-line estimates on each for the first quarter, predicting that more writedowns will force the firms into quarterly losses, according to Bloomberg. Shares added 11.3% and 13%, respectively.

At the same time, Lehman Brothers (LEH Quote) set plans to offer up to 3.45 million shares of convertible preferred stock, after which shares bounced 17.8% in very heavy trading.

That helped boost the Amex Securities Broker-Dealer Index, which soared 8.6%. The NYSE Financial Sector Index rocketed 6.1%, and the KBW Bank Index was up 7.1%.

"It's interesting to see things rallying in the face of two pretty good-sized writedowns," said Bill Stone, chief investment strategist with PNC Wealth Management. "I think it's come to where people are able to take some of the worst-case off the table because [financial firms] are raising capital ahead of when they need it," he added, referring particularly to Lehman.

Sheldon noted that it's probably premature to proclaim an end to the writedowns, and Fitzgerald concurred, saying that these will "definitely" linger for at least a couple more quarters. He added, however, that the year-over-year comparisons will get much better in the third quarter, the anniversary of when financials began taking massive hits. "The market always seems to react to that even though everyone already knows about it," he said.

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