Financial stocks plummet, reversing rally

NEW YORK (Reuters) - Financial stocks plunged on Thursday after a weak housing report raised concerns about the strength of the U.S. economy and encouraged investors to take profits on shares that had rallied 40 percent over the last week.

Seattle-based regional bank Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) dipped over 18 percent to $3.80, while the investment bank Merrill Lynch dropped over 13 percent to $29.22. Large U.S. banks, as measured by the KBW Bank index .BKX fell 6 percent, after having risen 40 percent between July 15 and July 23.

The declines came after a report on Thursday said the pace of existing home sales fell to a 10-year low and U.S. jobless claims jumped.

"Financial stocks have had a great run-up and when you look at some of the weak indicators, be it home sales or jobless claims, people are saying: 'I'm going to book profits,'" said Matt McCormick, an analyst at Bahl & Gaynor Investment Counsel.

Financial stocks had broadly rallied after earnings from companies, including major commercial banks JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) beat expectations.

JPMorgan and Citigroup shares dropped 4 percent and 8 percent, respectively, on Thursday.

Other financial companies, including insurer AIG Inc (AIG.N: Quote, Profile, Research, Stock Buzz) and the government backed entities Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), also fell.

AIG dipped 6 percent to $28.6, while Fannie was one of the worst affected, falling over 18 percent to $12.21 and Freddie hit $9.12, down over 15 percent.

"Nothing's changed. It's just that fast money came into this space, took things up aggressively and is now taking it down just as quickly," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

(Reporting by Elinor Comlay, additional reporting by Dan Wilchins; Editing by Andre Grenon)