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Following a bombardment of nasty credit-related reminders, bulls are hoping round two of global relief efforts and one sharp “V”-shaped performance on Friday take hold entering the week. For the five day period the S&P500 ($SPX) cash is off a mind-boggling and potentially redemptive 18.20%.

THE WEEKLY NUTSHELL

• Negative “New Deal Version 2.0” follow-through and fresh German-led credit contagion woes send markets reeling Monday. VIX explodes to all-time-highs of 58%. BofA (BAC) helps spearhead downside after modifying 400K troubled mortgages. Fed announces TAF increase to $900B to help insure liquidity to credit system, but to no avail. Second half rally off historic sentiment extreme lows and French G8 emergency meeting proposal cuts losses in half to ‘just’ 3.5% to 4.5% in majors.
• Technical-based bargain-hunting, global government efforts at credit market stabilization and optimism over future rate provisions promote Tuesday’s out-the-gate jump higher. BofA warning, dividend cut and $10.0B capital raise news, downgrades (IBM, DIS, GOOG and FSLR) and intraday disappointment over Bernanke economic and market testimony and FOMC Minutes send markets deep into “So, you think you know value” terrifying territories.
• Nikkei 9% swoon, weak earnings (AA, MET), soft retail sales (KSS, TGT, JCP) and existing ultra high and record-setting negative sentiment battle concerted global rate cuts in wildly volatile session that ends on yet another low note for bulls.
• Out the gate lure and lore of bullish Yom Kippur relief efforts courtesy of IBM (IBM) upside preannouncement and grossly oversold market. Bears regain control, sending historic correction spiraling lower. Key factors include record-setting levels of negative sentiment, forced margin selling, short-selling ban lifted on “The 800-Plus Club” and GM’s (GM) “Credit Watch Negative” initiation by S&P ratings agency.
• “Mother of all bottoms Friday?” Continued tight and fragile credit markets, collapse of Japan’s Yamato Life Insurance, credit downgrade reviews for Morgan (MS) and Goldie (GS) from Moody’s and disappointing CDS auction for Lehman debt all factor into intraday losses of 8% in S&P500. Last hour buying surge spearheaded by beleaguered and battered financials (XLF), fresh record-breaking sentiment lows and session-long supportive “in-line” results from GE (GE) sans any credit-related confessionals.

ON TAP THIS WEEK

Entering Monday, trader action will continue to be dictated by the credit markets. Over the weekend, a fresh round of global government-driven efforts at stabilizing financial and credit markets are finding traders reacting favorably overseas.

Highlights by world policymakers include Treasury Secretary Paulson saying the US will inject capital directly along with a “standardized program” into a ‘broad array’ of financial firms, in order to attract private capital alongside government funds. Officials are said to be working furiously to “do it right” and quickly—as to get recapitalization efforts up and running.

Related, the G7 went about scripting a one-page document aimed at regaining investor confidence and stabilizing global markets, as well as pledging to use “all available tools.” According to MarketWatch.com, the outlined plan “was sweeping in scope but short on specifics”, with traders still left to wonder whether the guaranteeing of worldwide interbank debt will be included.

And finally, but certainly not the end of the story, many of Britain’s top banks (RBS, HBC, BCS) will be announcing how they intend to raise billions of pounds through her Majesty’s funds and private investors in order to meet a mandated increase of roughly $25.0B pounds.

The Q3 earnings season should begin to vie for headlines and act as a potential tone-setter as the week progresses. For most, the week will begin at a snails pace with Intel (INTC), CSX (CSX) and Pepsi (PEP) all reporting on Tuesday.  There are a few other reports, but none likely to garner broad-based efforts at striking the buy or sell button.

Most eyeballs will rightfully be focused on the numerous financial (XLF) confessions that begin to hit media outlets Wednesday morning. First up will be JP Morgan (JPM) that morning followed by Wells Fargo (WFC) in the After Hours market. Not to be forgotten though, heavyweights like the fore-mentioned threesome, with strong ties to the economic cycle and solid balance sheets void of those tainted toxic assets plaguing the financials; could prove equally critical in investors’ ability to find confidence (once more) in the market.     

Weekly Calendar of Key Reports

Monday:
Economic NA

Earnings Fastenal (FAST), XL Cap (XL)

Tuesday:
Economic 

Earnings J&J (JNJ), Pepsi (PEP), Supervalu (SVU), WW Grainger (GWW), Altera (ALTR), CSX (CSX), Genentech (DNA), Intel (INTC), USANA (USNA)

Wednesday:
Economic Weekly Crude,

Earnings BlackRock (BLK), C Schwab (SCHW), Coke (KO), Delta (DAL), JP Morgan (JPM), St Jude (STJ), Wells Fargo (WFC), Badger (BMI), eBay (EBAY), Novellus (NVLS), Landstar (LSTR), Steel Dynamics (STLD), Xilinx (XLNX)

Thursday:
Economic Weekly Claims, Wholesale Invs (0.4%)

Earnings Bank of NY (BK), BB&T (BBT), Citigroup (C), CIT Group (CIT), Continental (CAL), Cypress (CY), Harley (HOG), Hershey (HSY), Illinois Tool (ITW), Merrill (MER), Nokia (NOK), Nucor (NUE), Parker Hannifin (PH), Sherwin W (SHW), Sonoco (SON), Southwest (LUV), Sunpower (SPWRA), United Tech (UTX), Cap One (COF), Gilead (GILD), Google (GOOG), IBM (IBM), Intuitive Surgical (ISRG), Zions Banc (ZION)

Friday:
Economic 

Earnings Amcol (ACO), Comerica (CMA), Genuine Parts (GPC), Honeywell (HON), Schlumberger (SLB), VF Corp (VFC), Wilmington Trust (WL)

TECHNICAL PICTURE

Figure 1: S&P500 ($SPX) Daily

Was Friday the proverbial “Mother of all bottoms?” From down 8% on top of already existing head-spinning declines for the week, the near 12% rally from lows in the last hour of trade, certainly makes the case for a “V”-shaped bottom.

In conjunction with record-breaking implieds near 77% in the VIX, a staggering lopsided count for a bullish conclusion per sentimentrader.com and October being a perennial favorite for bottoming efforts; why not? Of course the lost art of knife catching will have to ignite investors collective fancy for bargain-hunting, in order for an intermediate upside reversal to work.

After such a severe bout of negative sentiment, the expectation is for some backing and filling to occur. I’d also expect any price declines to be harsh enough as to raise doubts, but ultimately fail to undercut the lows in place. Also the opinion of this well-intentioned observer, as the historic price swings of Friday’s final hour are a testament—softer delta / softer vega plays made available only in the options market are thought very well suited for traders looking to suit up as either bulls or bears in one very mad money market.

MARKET LAB

Bullish Technicals

• Oversold panic extremes in market sentiment / indicators.Knack for major market lows in October. Yom Kippur buy signal last Thursday. VIX hits all-time-highs near 77%. Multiple bottoming failures and oversold RSI 14 below all qualified supports.
• DJ-30 lows btw 200-month SMA and EMA.
• Dumb / Smart $$ extreme spread at sentimentrader.com.
• Historic “Bullish For Stocks” vs “Bearish” 39 – 0 at sentimentrader.com.Worst bear since 1933. 8-straight decliners in SPX.

Bearish Technicals

• Bear Market.

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
 
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

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