NEW YORK — Shares of financial companies declined Tuesday, weighed down by concerns about the Federal Reserve's latest interest-rate meeting and as Rochdale Securities analyst Dick Bove said the rebound in bank stocks is driven by psychology rather than fundamentals.

"Investors should take short-term profits because the stocks seem to have moved way beyond the earnings potential of the companies," Bove told Dow Jones Newswires, adding that even though he feels positive about the long-term outlook for the industry, the stocks have "moved too far too fast" on little change in earnings, including expectations the third and fourth quarters won't show improvements.

Bove said the market has gone through three stages psychologically in looking at bank stocks — including valuing stocks at liquidation prices about nine months ago on fears the industry would go under and valuing banks at some multiple of normalized earnings in the spring. He said at this point, stocks are being valued based on pre-tax, pre-provision earnings.

"In each case, there was a change in view as to what the companies were worth," Bove said. "The prices of the stocks kept going up to reflect that change. The problem is some of these stocks have literally exploded."

For example, the stock of Bank of America Corp. has increased fivefold from its low, while Fifth Third Bancorp's shares have risen nine-fold.

Bove said in a note that he believes "these stocks are trading on 'fumes' and not reality."

Motley Fool analyst James Early noted financial companies have rallied recently, and shares are coming down a bit from those gains. "The fact that this recent rally might have been a sucker's rally is in the back of everyone's minds," Early told Dow Jones Newswires. "Traders are pulling a little bit back because of that."

He said the market has seen a lot of the lowest quality names reverse, including in financials.

"A lot of the hardest to fall were the first to bounce back," Early said. "We're not seeing quite the flight to quality, frankly I would expect, given the fundamental economic climate."

Meanwhile, the Fed's latest meeting begins Tuesday and will culminate with a policy announcement Wednesday. The central bank is expected to leave its key rate target unchanged, though participants will parse the committee's statement carefully for any hints about policy makers' views on the potential for a U.S. rebound in the months ahead. Traders traditionally avoid making big bets immediately before such scheduled announcements.

In recent trading, the KBW Bank Index was down 4.2%, while the KBW Regional Banking Index dropped 5.1%. Bank of America slid 4.2% to $15.98, while Citigroup Inc. lost 6.35% to $3.69. Wells Fargo & Co. declined 5% to $27.21.

For the regional banks, Huntington Bancshares Inc. fell 7.75% to $4.40. Fifth Third slipped 0.92% to $9.64, and Zions Bancorp lost 9.65% to $16.20. SunTrust Banks Inc. declined 5.26% to $20.55, and Marshall & Ilsley Corp. slid 6.27% to $6.73.

Struggling commercial lender CIT Group Inc. dropped 18% to $1.21 as it delayed filing its quarterly report with the Securities and Exchange Commission, saying it couldn't meet Monday's deadline "without unreasonable effort and expense" during its restructuring.

Insurers, meanwhile, also traded lower, with the KBW Insurance Index down 3.2%. Genworth Financial Inc. slid 7.2% to $8.20, while Lincoln National Corp. declined 5.16% to $21.89.

American International Group Inc. shares changed course after rising for four consecutive trading days. Even with Tuesday's declines - recently down 10.5% to $25.68 — shares have about doubled for the month.

Morningstar analyst Bill Bergman said he doesn't think the AIG run-up was justified, though it's a hard call to make.

"It's not a penny stock, but it's close," Bergman said in an interview. "There's a reason it's so volatile. There's so much uncertainty. "

He said the depth of the company's derivatives losses are still unknown, and it's still uncertain how the government's holding in the company will impact it.

"It's still likely shareholders don't have anything at the end of the day, but it's possible, which is why it's trading like a yoyo," he said.

Bond insurer MBIA Inc. also tumbled 14% to $5.29 after JPMorgan downgraded its rating to underweight from neutral. The firm said capital will eventually be overwhelmed by its losses on CDOs and residential and commercial mortgage-backed securities. Ambac Financial Services Inc. also traded lower, down 8.56% to $1.07.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.