US Stock markets rallied Tuesday on the back of the release of an internal memo at Citigroup in which CEO Vikram Pandit is “upbeat” and argues that the current stock price of $1 does not reflect the company’s earning power and capital position. Further contributing to the rally were comments from Rep. Barney Frank (D., Mass.), Chairman House Services Committee, indicating that the often debated “uptick rule” may return in a month. Frank was quoted as saying “I am hopeful the uptick rule will be restored within a month”, according to CNBC.

Although these pieces of news are good reason for a rally, I think that the 6% rally that we’ve seen in the Dow & S&P 500 is a bit overdone. Its my suspicion that a good portion of the upswing that we’ve seen was driven by short covering in financial stocks which have been beaten down lately. Any sign of financials returning to profitability and/or rules hindering short sellers are good reasons to cover existing shorts.

Pandit’s memo is optimistic and details that Citigroup has been profitable over the first two months of the year. The market rallied on the back of this, which I think is overdone. Pandit’s statement comes as no surprise to me as banks have continued to make money throughout this crisis if we exclude the massive writedowns they have been taking on their “toxic assets”. The majority of these writedowns usually happen around quarter-end before a company releases earnings. Citigroup holds the largest amount of these “toxic assets” on their balance sheet when compared with other banks, so for me it’s going to be another month before we can pass judgment on if Citi is returning to profitability. For me its a crapshoot as the market for these “toxic assets” continues to deteroriate. Full text of the Pandit memo can be found here.

As for the return of the uptick rule, nothing is DEFINITE, but Barney Frank’s words are encouraging. I’m taking a wait and see attitude with this market and not getting too excited about the news.

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