After Monday's rally, bank stocks traded in a narrow range of gains and losses Tuesday, dragged lower at times on profit-taking.
Boosted by new government steps to free up the flow of credit, however, the KBW Bank Index pushed into and stayed in the black in the final hour of trading; closing up 2.8% after spiking 17% a day earlier.
"After the big rally, you have some profit-taking," Michael Nasto, a senior trader at U.S. Global Investors Inc., said in an interview Tuesday. "And I don't think anybody expects much volume Wednesday, a day ahead of Thanksgiving, so anybody who didn't want to be holding too much going into a long weekend unloaded some. But things have been steady, positive in general."
The broader markets inched ahead. The Dow Jones industrial average was up 0.4% after Monday's 5% gain, and the Standard & Poor's 500 index closed up 0.7%.
Citigroup Inc., which led Monday's rally with a 58% jump after securing a taxpayer-funded, $20 billion capital infusion to guard against a collapse that could have decimated confidence in the entire bank sector, gained another 2.2% Tuesday. Gary Crittenden, its chief financial officer, said in an interview Tuesday that the markets appeared to recognize that the government support "is good for us and the financial system broadly."
Other large-cap banking companies also fared well. JPMorgan Chase & Co. rose 7.9%, Wells Fargo & Co. 3.6%, and Bank of America Corp. 1.4%.
Shares of E-Trade Financial Corp. soared 44 cents, or 50%, after the online brokerage and banking firm said in a press release that it "remains optimistic" about its chances of getting a large capital injection from the Treasury. E-Trade applied for $800 million from the Treasury's Capital Purchase Program on Nov. 7, when its shares were trading at $1.71. Since then, with no response from the Treasury, its share price had plunged to a low of 88 cents at Monday's close.
Bank stocks, as a whole, got a boost after the Federal Reserve said it would extend as much as $200 billion in nonrecourse loans to holders of securities backed by consumer and small-business loans. The central bank also said it would buy up to $100 billion of debt issued by the mortgage giants Fannie Mae and Freddie Mac and up to $500 billion of mortgage-backed securities backed by the government-sponsored enterprises. The steps were taken to unclog credit markets.
"The free flow of credit is the most important thing that can happen right now" to bolster economic activity and help the country emerge from recession, Eugenio Aleman, a senior economist at Wells Fargo & Co., said in an interview Tuesday.
Fannie Mae gained 38% Tuesday, and Freddie Mac rose 18%.