Stocks eye banks, short-sale rule

By Deborah Jian Lee

NEW YORK (Reuters) - In the heart of earnings season, stock market investors will scrutinize a raft of regional bank earnings this week for more write-offs that could send the market tumbling.

The S&P 500 and the Nasdaq snapped a six-week losing streak on Friday with financials helping to drive the market higher on the back of stronger-than-expected results from the likes of Citigroup, JPMorgan Chase and Wells Fargo. A sharp drop in oil prices improved sentiment and lifted the market.

For the week, the Dow Jones industrial average gained 3.6 percent, its best week in three months, while the Standard & Poor's 500 Index rose 1.7 percent and the Nasdaq Composite Index advanced 2 percent.

Still, while the week ended with financial services as the second-biggest boost to the S&P 500, regional banks were one of the heaviest drags. The S&P Regional Banks index ended Friday's session down 0.8 percent.

After U.S. banking regulators swooped in on July 11 to take over IndyMac Bancorp Inc, making it the fifth U.S. bank to fail this year, investors will key in on regional bank results as a measure of how the U.S. banking system is holding up in a fragile economy.

"Most of the major financial institutions have reported, so there's going to be attention on the flow coming in from the regional banks. We'll be watching for write-offs on the regional banks," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.

Bank of America Corp, the No. 2 U.S. bank, headlines the week with its Monday earnings report. Regional banks in the spotlight will be Regions Financial Corp, Fifth Third Bancorp, SunTrust Banks Inc and Wachovia.

This week also will usher in earnings from large-cap companies, including Dow components Pfizer Inc, AT&T, and Caterpillar, as well as Nasdaq stalwarts Apple Inc, and Yahoo! Inc.

The week ahead "is going to be a heavy reporting week, so the continuing wave of second-quarter earnings reports will be important," Dickson said.

BEARS ON A SHORT LEASH

This week also marks the start of an emergency rule introduced by the U.S. Securities and Exchange Commission that will limit certain types of short selling in the stocks of 19 major financial companies, including all the major investment banks as well as the huge mortgage finance companies Fannie Mae and Freddie Mac.

"The short-selling announcement last week really set the stage for the bounce in financials on Wednesday, and that's been a big psychological lift for investors," Dickson said.

Short sellers make bearish bets that a stock's price will fall. On its own, short selling is a legitimate investment strategy.

But the SEC aims to curb abusive "naked" short selling, where investors have not actually borrowed the stocks before the short sale occurs.

Last Sunday, on July 13, the U.S. Treasury and the Federal Reserve unveiled a rescue plan for Fannie Mae and Freddie Mac in an attempt to shore up confidence that the twin pillars of the U.S. housing market will continue in that role.