Bank issues outpace other equity groups after 6-week selloff.

The skies finally seem to be brightening for the much-battered bank slocks.

In a strong showing last week that was punctuated by several rating upgrades, the banks significantly outpaced other stocks.

The upswing after heavy selling over much of the preceding six weeks came in tandem with a rise in bond prices, thanks to an easing of interest rates due to receding concerns about inflation.

"The banks were the turkeys of November, but they now seem straightened out and ready to fly right for a while," observed Frank J. Barkocy, senior banking analyst at Advest Inc.

The prospects for increased fourth-quarter earnings estimates and sweetened first-quarter dividends give cause for optimism.

Cullen/Frost a Winner

The American Banker index of 225 bank stocks was up 1.85% during the five trading days ended Thursday. By comparison, the Dow Jones industrial average was up only 0.4%.

In Friday's trading, many major banks tallied further small price increases. Among the gainers again was Cullen/Frost Bankers Inc. of San Antonio, Tex., up 50 cents in late trading to $35.75.

Cullen/Frost, which many observers believe is a tempting target for banks seeking to enter or expand in Texas, appreciated an impressive 10. 5% in price last week.

The calendar may well have been a factor in the banks' strong performance last week.

"Looking back over the year, bank stocks have always outperformed in the last month of the quarter and then to the beginning of the earnings reports," noted James M. Rosenherg, money center bank analyst at Lehman Brothers.

|Selling on the News'

The banks then quickly lose large chunks of ground as investors appear to follow the classic Wall Street credo of "selling on the news."

"Many institutional investors have owned bank stocks for as long as three years, since stocks began to turn [upward in late October 1990]," explained Mr. Rosenberg.

"They naturally feel that it has been too much of a good thing for too long, and they are nervous," he said.

Uptrend Called |Intact'

"They are looking for more reasons to sell than to buy, so they jump on the bandwagon on any possible reason for selling," he said, "and then they realize they've been too early yet again."

The Lehman analyst thinks this pattern, starkly apparent during the past three quarters, could go on for another three quarters, since he believes the "bank stock uptrend is still intact."

Mr. Barkocy said he thought the especially severe clobbering suffered by the banks during November was due to that pattern as well as renewed fears of higher rates and the Federal Reserve Board's rejection of a bank merger.

Shawmut Called a Factor

The Fed on Nov. 15 rejected Shawmut National Corp.'s application to buy New Dartmouth Bank, Manchester, N.H. It was the first time the Fed had turned down a merger based on concerns about discrimination in lending.

"At first it appeared the Fed was becoming more restrictive on banking acquisitions, using bias considerations as a means of limiting the momentum in this area," Mr. Barkocy said. "But it now appears there is not a far more stringent policy in place."

Shawmut, based in Hartford, Conn., has since said it believes it can meet the Fed's objections and will still be able to buy New Dartmouth.

|Price Spiking' Seen Unlikely

Meanwhile, bond prices have strengthened as inflation appears tamed. In particular, global crude oil prices are down sharply. Mr. Barkocy expects bank stock prices over the next few weeks to enjoy a "gradual reovery from oversold positions" but also thinks "a spiking up of the prices" is unlikely.

"Prospects for good yields and total return are tempting back traditional investors," he said.

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