Stocks up strong

Stocks are flying high at midday today on news that Citigroup (NYSE:C) reported it was profitable for the first two months of 2009.

At 1:27 pm ET, the Russell 2000 (NYSE:IWM) is up 19.94, or 5.81%, to 363.20. The Dow is up 4.27% to 6,826.77, and the S&P 500 is up 5.06% to 710.76.

Also helping stocks make large moves today was news that Congressman Barney Frank, chairman of the House financial services committee, said he expects the restoration of a rule that makes it harder to bet that a share's price will fall. Investors were encouraged by Frank's comments.

Financial stocks are in rally mode today following statements made by U.S. Treasury Secretary Timothy Geithner on Monday that the United States has taken more economic action in recent weeks than most countries have in years to ease strife.

Small caps seeing double-digit gains today include Gaylord Entertainment Company (NYSE:GET), up 33% after a proxy deal, and AM Castle (NYSE:CAS), which topped Q4 views and declared a $0.06 per share dividend, sending shares 42% higher.

Stocks up strong

Once again, early strength for stocks yesterday quickly turned to weakness. There is a battle going on between the bears and the bulls. Despite all time lows for consumer sentiment, there is a growing number of analysts and market strategists who believe a rally is at hand.

We’ve been seeing signs of a rally for a couple weeks now. That’s why I recommended taking a few positions in select stocks.

Even though we have yet to see a sustained move higher for the major indices, you could be flat to slightly up on SXC Health Solutions (Nasdaq:SCXI) recommended in my SmallCapInvestor PRO advisory service on February 18 and here on SmallCapInvestor.com on February 26. Graham Corp (AMEX:GHM), CardioNet (Nasdaq:BEAT) and Emergent Biosciences (NYSE:EBS) also appeared in the March 2 edition of Small-Cap Daily.

Of these stocks, SXC Health Solutions is probably my favorite. Its recent earnings report looks very good.

I’m most nervous about Graham. Given the recent strength in oil prices, this small oil services company should have advanced more than it has. But it’s up 7% as I write, so I’m willing to give it the benefit of the doubt, for now.

Citigroup's optimism

The most obvious catalyst for the strength in the stock market today comes from Citigroup. CEO Vikram Pandit is saying the bank is having its best quarter since 2007.

Of course, when you get $40 or so billion in cash, you ought to be able to find a way to make some money. But I suppose now is not the time to question the quality of Citi’s newfound optimism. The market likes it, stocks are higher, let’s enjoy it.

*****Earnings is one of the big wild cards right now. According to current estimates, the S&P 500 has a P/E of approximately 11. That number includes an expected $0.70 per share loss from Citigroup. And I’m sure that Citigroup isn’t the only company whose losses are weighing on valuations.

But suppose Citigroup is able to turn its losses around quicker than expected? That would instantly lower the P/E for the S&P 500 and make stocks more attractive.

Now, I want to emphasize that I’m not saying this will happen. Only that this is part of the bullish sentiment that is driving prices higher.
 
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