The Dow Jones industrial average rose 130 points in light trading volume. Goldman has long been considered the strongest bank amid the economic downturn, but Bank of America has been one of the hardest hit by loan losses. Any improvement in banks’ profits could shore up their financial position and free money for lending.

Investors latched on to Whitney’s comments because she has for years offered one of the more pessimistic — and accurate — assessments of the banking business. While she still remains cautious about the industry over all, the shift in tone gave investors a jolt. Bank of America (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), and Citigroup Inc. (NYSE: C) are all scheduled to report second-quarter results this week. Banks have taken some of the biggest blows among U.S. companies since the recession began in late 2007 as investment and loan losses mounted. ”There is a contingency of traders out there that believe the market can’t recover without financials,” said Randy Frederick, director of trading and derivatives at Charles Schwab. Earnings reports will give investors a chance to see whether there was any meaningful economic improvement during the second quarter, and so far expectations are low.

Stocks rallied in the spring amid hope of a recovery in late 2009, but the market has struggled since mid-June as more investors began to doubt that assessment. In early afternoon trading, the Dow rose 130.97, or 1.6 percent, to 8,277.49. The Standard & Poor’s 500 index rose 15.20, or 1.7 percent, to 894.33, while the Nasdaq composite index rose 23.01, or 1.3 percent, to 1,779.04. Among financial stocks, Goldman (NYSE: GS) rose $7.51, or 5.3 percent, to $149.38 and Bank of America rose 83 cents, or 7 percent, to $12.71. The KBW Bank Index, which tracks 24 of the nation’s largest banks, rose 4.6 percent. Not all financial stocks rose. Commercial finance lender CIT Group Inc. said it is talking with regulators about ways to improve its short-term liquidity as recent losses may jeopardize its compliance with capital requirements.

Treasury Secretary Timothy Geithner said Monday, from London, that he was confident the government has the authority and the ability to address the crisis at CIT. The stock tumbled 31 cents, or 20.6 percent, to $1.22. Earnings reports are expected from major companies in a range of industries this week, including Dow industrials components Johnson & Johnson, International Business Machines Corp. and General Electric Co. and technology bellwethers Intel Corp. and Google Inc. ”People are focused on sectors battered the most to see if there is any bounce-back,” said Dan Deighan, founder of Deighan Financial Advisors in Melbourne, Fla.

Financial firms and retail companies will probably be the most closely watched industry as earnings are released, he said. Data coming out this week also will offer insight into the economy. Investors will get readings on inflation, retail sales, industrial production and housing starts throughout the week. Last week, stocks continued a four-week slide as the Dow dropped to 8,147, its lowest level since April 28. Since mid-June, investors have been giving back some of the 40-percent gains picked up during a vigorous rally that began in March. Concerns have been mounting that the rally was overdone and investors are now waiting for fresh signs the economy is actually improving instead of just weakening at a slower pace. The gains in stocks cooled demand for the safety of government debt, hurting prices and lifting yields. The yield on the benchmark 10-year Treasury note rose to 3.31 percent from 3.30 percent late Friday.

The survey, published by the CSFI and supported by the Council of Microfinance Equity Funds was designed to identify and rank the main risks facing the industry at a time of economic crisis and change. It reflects the views of more than 400 practitioners, investors, regulators and analysts in 82 countries. The survey shows that the greatest risks all stem from the crisis: a surge in bad loans, shortages of liquidity and funding, and declining profitability. Other top concerns surround the ability of microfinance institutions to manage their way through the crisis because of weaknesses in management and corporate governance.

The survey updates a previous poll carried out in early 2008 at the beginning of the crisis, and shows how sharply risk perceptions have changed since then. Most of the risks which are now seen as threats to the sector’s prospects, such as the world recession and the credit crunch, were considered negligible only 18 months ago. These findings turn the earlier survey on its head. Last year’s result reflected the traditional view that microfinance operates in a world of its own with abundant funding and loyal customers. But the crisis has shown that it is also exposed to the shocks of the ‘real economy.

The Swiss National Bank and banking regulator FINMA made it clear they wanted UBS to strengthen its capital, potentially paving the way for the government to sell a 9 percent stake. That is likely to have kicked UBS into action. Its rivals will not be under the same pressure, but a difficult economic backdrop could prompt them to take advantage of an improvement in investor confidence in recent months. The Swiss regulator is clearly getting a lot tougher than other regulators,” said Simon Maughan, analyst at MF Global.

But at the same time there are siren voices, from the U.S. in particular, saying the whole banking system in Europe is overleveraged and it needs to come down and banks will be raising capital for a long time to come. Banks including Spain’s BBVA, Germany’s Deutsche Bank and lenders in Italy and France are most in need of fresh capital to build up a buffer, several analysts and bankers have said.

UBS follows Barclays in addressing worries about low capital, after the British bank sold its asset management arm for $13.5 billion earlier this month. U.S. banks have raised billions this year to repay taxpayer bailouts, leaving capital ratios at most European peers lagging. Europe’s banks have raised $43.4 billion this year to account for 30 percent of the total raised by banks globally. Last year they raised a record $126 billion, or 40 percent of the global amount, according to Thomson Reuters data. By comparison, U.S. banks have raised $69 billion this quarter alone, adding to a record $150 billion raised in 2008.

The prospect of rising bad debts could force banks to act, although strong first-half profits from most investment bank arms could provide a boost to capital. But bad debts are not expected to peak until 2010, and euro-zone banks face another $283 billion of writedowns in the next 18 months, according to the European Central Bank. Banks need to continue paying close attention to risks of more losses on toxic assets, Bank of France governor Christian Noyer warned on Friday, although he said the solvency of his country’s banks was “satisfactory.

The Commerce Department reported that retail sales fell 0.4% in April from the prior month, a steeper decline than the 0.1% slip economists expected. Sales in March were revised down. Consumer spending makes up more than two-thirds of U.S. gross domestic product, the broad measure of economic activity. GDP shrank at a 6.1% rate during the first quarter and would have contracted farther if not for a minor spurt in consumer spending. If Americans continue to curb their purchases of goods and services in the months ahead, that would undermine the scenario of a second-half economic rebound that investors have been hoping to see.

The week’s consumer spending report also struck at a time when many market veterans believe stocks are vulnerable to a correction following a bustling springtime rally. Investors are carefully sorting through individual names, looking for those best positioned to weather the remainder of the recession. 

Other data suggested little relief in the housing sector – a key driver of the recession that has dragged on since December 2007. A report by RealtyTrac showed that the number of U.S. households facing foreclosure jumped 32% in April, and mortgage applications fell last week as fewer homeowners sought to refinance. 

One new source of pressure facing consumers is a resurgence in energy prices. Crude-oil futures have climbed back to around $60 a barrel after falling close to $30 a barrel earlier this year. Data Wednesday showed import prices jumped by 1.6% last month thanks to the jump in fuel prices. Oil futures remained high in early trading, hovering above $58 a barrel ahead of a weekly stockpiles report. 

Asian markets ended mostly higher, with the Nikkei up 0.5% boosted by a better-than-expected earnings outlook from Nissan Motor. Stocks in Europe were lower.

The New York based lender Citigroup, who had received three U.S. government rescue packages watched as its shares rose 25 percent higher.  The financial giant Bank Of America gained 15 percent and Goldman Sachs added five percent.  The nation’s second biggest home lender, last week reported about three billion in first quarter net income which was up from the previous year.  Apparently, the financial giants are leading the U.S. market recovery. 

Now that the banking sector is stabilizing experts believe the cycle will continue to move upwards. Citigroup, Goldman Sachs and JP Morgan who are all based in New York, are scheduled to release earnings this week. Bank of America, based in Charlotte, North Carolina, and New York’s Morgan Stanley will report next week, along with Wells Fargo. Citigroup and Morgan Stanley are expected to report a loss on a per-share basis, and the four others will probably post a profit, according to analysts’ estimates compiled by Bloomberg. Fears of nationalization have pretty much vanished as it’s becoming clear that the banks are slowly getting back on their feet.