Alex. Brown & Sons Inc. stock surged Thursday on rumors reported by CNBC that Bankers Trust New York Corp. would acquire the Baltimore brokerage firm. Alex. Brown's shares rose $3.25 to $44.625.
Meanwhile, larger banks' stocks plummeted in morning trading, then reversed course later in the session. Smaller banks' stocks, meanwhile, continued to be pummeled.
The Standard & Poor's bank index rose 0.85%, while the Nasdaq bank index-made up largely of small thrifts and community banks-fell 0.23% The Dow Jones industrial average fell 0.61% as the broader Standard & Poor's 500 composite stock index rose 0.03%.
The top gainers of the day included J.P Morgan & Co., which rose $2.125 to $99; Citicorp, up $1.75 to $111.625; and First Chicago NBD Corp., up $1.875 to $54.125.
Market observers said much of the confusion apparent in Thursday trading's was prompted by the possibility of future interest rate hikes alongside the prospect of impressive first-quarter earnings.
"Banks are in the center of the storm, and they will feel it with greater intensity than most other groups in the market," said veteran bank analyst George M. Salem of Gerard Klauer Mattison. "In other words, wherever the market is going, banks stocks will get there first."
Michael Clark, managing director of U.S. equities at UBS Securities, said banks have "suffered almost enough at this point" but could fall another 5% to 10% if Friday's monthly employment report suggests higher interest rates.
But Mr. Clark is optimistic: "The sector is oversold and should bounce. People are expecting fairly stable earnings and you will see a pop off the earnings."