I received an email from a subscriber last week, asking, “What do you think about the banking sector after the M2M has been approved?  Should I get some like BAC, WFC, UBS? ”

M2M, for the record, stands for mark-to-market, the accounting practice of valuing an institution’s assets at the price the market would pay today.  Critics of the practice say mark-to-market accounting is partly responsible for the past year’s market crash, and argue that institutions should be allowed to value their assets at prices they believe can be realized in a “rational market.”  In fact, Representative Steve Cohen, D-Tenn., has introduced a bill that directs the U.S. Securities and Exchange Commission to suspend the application of mark-to-market accounting.  On the other hand, Lloyd C. Blankfein, chairman and CEO of Goldman Sachs (GS), strongly endorses mark-to-market accounting and comprehensive transparency of financial company risk.  (Goldman Sachs stock, by the way, looks pretty healthy.)

My correspondent, therefore, was asking whether stocks in the banking sector might be a good investment based on the expectation that repeal of mark-to-mark accounting requirements would lead to fatter balance sheets and thus higher stock prices.

It’s a logical question, and I have a logical answer.

My first point is that my correspondent is not the first person to entertain this train of thought.  Thousands of professional investors have done it before him.  They’ve already come to their conclusions, and they’ve placed their bets accordingly.  Therefore the charts of the stocks that might be affected by the change reflect their conclusions.  This is a key point; the charts know all.  In fact, the charts reflect the conclusions of professionals on other factors that might influence these stocks, too.  These include the future trend of interest rates, the future of the housing market, even the possibility of increased government regulation.

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And what do the charts say?  First, that the three stocks mentioned–Bank of America (BAC), Wells Fargo (WFC) and UBS (UBS)–have all had nice bounces in the past month.  On average, they’re up 118% since the early March bottom.  They had an especially nice move last Thursday after Wells Fargo surprised analysts by projecting a record $3 billion profit for the first quarter.  This bounce, of course, coincides with the bounce of the broad market, which is up about 25% since the bottom.

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But that doesn’t mean these stocks are in long-term uptrends.  In fact, this bounce mainly gets them back up to the upper range of their downtrending channels.  And those downtrending channels are very important because they’re the result of a long-term trend.  In fact, even after this big bounce, these three stocks are down, on average, 85% from their old highs.

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Now, I tend to think that the big downtrend in financial stocks is over … of course, I could be wrong.  But the strength in recent weeks has been very broad.  And the selling pressures have been very weak.  Furthermore, internal measurements are very positive, telling us the next bull market is getting its act together.

Still, that doesn’t mean these three stocks (and other big beaten-down financials) have begun new uptrends.  History tells us, plain and simple, that a stock–or a group of stocks–that has experienced a huge damaging move will take a long time to build a base–perhaps years–before a new uptrend begins.  So the odds are against these stocks climbing much higher in the weeks and months ahead.

Certainly, there will be movement.  Institutional ownership of these stocks is widespread, and we think many institutions will be using this bounce to trim their positions in these stocks as they move into sectors with better growth characteristics.  Traders will happily jump in and out of these stocks in their short-term gyrations.  But I think your prospects are far better in other sectors, and I’ll discuss some of them tomorrow.