Whither the bottom for bank stocks?

It depends on whom you ask, but some market observers are sounding guardedly optimistic about the sector's performance these days.

Traders, analysts, and others say that even though the market could have more volatile trading days this year, investors may be testing a bottom, partly because of confidence that strong banking companies are getting stronger with infusions of inexpensive cash through the Treasury Department's Capital Purchase Program.

"I'd never call a bottom, but the government capital is helping to weed out the weak, and it's giving the healthy banks a good chance to find the bottom, if they haven't yet," Peter McCorry, a senior trader at KBW Inc.'s Keefe, Bruyette & Woods Inc., said in an interview Monday.

Companies like Washington Mutual Inc., Wachovia Corp., and National City Corp. that had struggled to get out of the red have being forced into sales, shrinking the number of banks facing the threat of capital hits.

Stronger companies — from JPMorgan Chase & Co. and Wells Fargo & Co. to PNC Financial Services Group Inc. — are being buttressed with cheap capital and the acquisition of even cheaper deposits through government-endorsed deals at discount rates.

U.S. Bancorp joined the other top six banking companies Monday by announcing it had received preliminary approval from the Treasury for the sale of $6.6 billion of preferred stock and related warrants.

The injection of taxpayer money will lift U.S. Bancorp's Tier 1 capital ratio from 8.5% to about 11%, the Minneapolis company said.

"After careful consideration, we have concluded that the capital available through the capital purchase program will augment our capacity to engage in increased lending activity and invest for future growth, and will enhance the company's capability to assist in stimulating" the economy, Richard K. Davis, its chairman and chief executive, said in a press release Monday.

U.S. Bancorp shares rose 1.6% Monday.

In a market where private capital is scarce, any company that can figure out a way to add capital without having to go to the market has made an important improvement, analysts said.

"I don't think we have to worry nearly as much about the capital issue anymore … and that has to have a favorable impact on the market," Terry McEvoy, an analyst at Oppenheimer & Co. Inc., said in an interview Monday.

Anthony Davis, an analyst at Stifel, Nicolaus & Co. Inc., said in an interview Monday that after another tough third-quarter earnings season, Wall Street had been watching closely to see if banking stocks would fall last month to below the point that they had reached in mid-July, during the height of the second-quarter earnings season.

Even though the sector was pummelled pretty severely last month, the KBW Bank Index did not match July's lows, indicating that a basement likely has been established, even if a sustained rally is not yet in the offing, he said.

"When bank stocks get down to tangible book value or slightly below, which they did in July, they generally don't go lower than that," Mr. Davis said. "Now, we tested that again in October, and we didn't go below July levels, so that's a good sign. We're continuing to watch tangible book value and, of course, which companies" are accepted in the Capital Purchase Program.

At the close of October trading Friday, traders, too, expressed relief that stocks hadn't sunk to October levels.

"We're seeing a lot of positive signs, a lot of positive buy-side activity, most of it based on the government funding," Joseph C. Morrissey, a bank-stock trader at Boenning & Scattergood Inc., said in an interview Friday.

Mr. Morrissey and others cautioned that uncertainty still permeates the markets. Investors, as a group, tend to look at least six months out, observers said, and next year they will be looking for signs that banking earnings will return to normal in 2010. If they find evidence to the contrary, observers said, more trouble could loom for the financial sector.

Myles Zyblock, the chief strategist at Royal Bank of Canada's RBC Capital Markets, said in an interview Monday that this concern explains why many investment strategists are only cautiously optimistic. "I do think there is a lot of optimism our there that the worst of the fundamental damage has already been priced into the markets, and there is a lot of talk about a bottom and a fourth-quarter rally," Mr. Zyblock said. "But you have to worry, with the fundamentals of the economy worsening right now, if any rally would be sustainable."

Traders said that, looking at the near term, stocks could get a bounce this week if a report the Labor Department is scheduled to release Friday shows that the October unemployment rate did not rise from September.

In addition, traders say the markets could get a lift if Sen. John McCain were to pull off a come-from-behind win over Sen. Barack Obama in the presidential election. "I think most investors would welcome a McCain win," Matthew Shields, a trader at FIG Partners LLC, said in an interview after the markets closed Friday.

The KBW Bank Index opened November with a 0.6% gain on Monday, its third straight trading day in the black.

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