--The beginning of the end in the cycle of any stock market sector is when the momentum investors start crowding in. Over the past year or two bank stocks have attracted not only the usual value-oriented institutional investors, but momentum and growth funds seeking “what’s working now.”

With the lousy relative performance of this group in recent months, those same momentum and growth investors are heading for the exits, it seems, and using those proceeds to build their exposure in better performing groups like energy and natural resource-oriented sectors. This phenomenon is one explanation for why rallies in the financials in 2005 seem to be short-lived.

--Moreover, as we implied in earlier comments, the sell-side on the whole is still too bullish on this group. We see too much “relative valuation” analysis on banks right now (“this stock’s at 10x earnings, while its peers are at 12x earnings, so buy it”). Such justification for buy recommendations, most experienced investors will tell you, is forced optimism which often leads to capital losses.

--Investment banking rears its ugly head in this equation as well. Merger & acquisition fees originating from the banking industry have been significant in recent years. Coming as no shock to anyone, investment bankers continue to exercise (at the least) subtle pressure on analysts regarding their comments on favored clients.

Wall Street has seemingly learned from the email droppings of past scandals, so the pressure exerted is direct and face to face. It exists, nonetheless.

Eventually, the sell side will largely throw in the towel and lose their bullish bent on the group, and a healthy proportion of them are fired by their short-sighted geniuses in senior management. At that point, the “all clear” sign should be flashing for investors.