October tiptoed out like a lamb, but November roared in like a full-on bear, with a Thursday-afternoon plunge precipitated by renewed credit market concerns, disappointing Exxon Mobil (XOM) earnings, crude oil's proximity to the $100 mark, and fears that future rate cuts may be out of the equation for a while. A muted finish on Friday didn't do much to set the indices on a path to recovery; the Dow Jones Industrial Average (DJIA) closed down 1.5% for the week, the S&P 500 was off 1.7%, and the Nasdaq Composite (COMP) actually managed a weekly gain, edging 0.2% higher. However, it should be noted that the S&P finished October with a 1.0% gain, once again defying widely advertised crash fears.

But while the major indices hit some turbulent times, they held above some significant levels of support, both from a round-number and a moving-average perspective. And a bounce from these support zones would be consistent with the market's behavior in recent months. Going down the line, the Dow held above 13,500, the S&P 100 Index (OEX) finished north of the round-number 700 mark, and the S&P 500 closed above than 1,500. What's more, the 1,490 level has proven to be remarkable support during the past couple of weeks when observing this index on an intraday basis. This comes as little surprise, as longer-term support, as defined by the index's 10-month moving average, is situated in this area. The SPX has not experienced a monthly close below this trendline since September 2004. Finally, S&P Depositary Receipts (SPY) moved forward off support from its 80-day and 160-day moving averages.

Of course, it's never smooth sailing after market turbulence such as that we've recently seen, and the current backdrop is no exception. The Dow still has 14,000 to retake, and the historically resistant 2,800 level is staring down at the Nasdaq Composite. And its 800-watch time yet again for the Russell 2000 Index; the small-cap collective closed mere points south of this century level in Friday's trading.

As I've pointed out in this space more than once, the 2007 stock market has been wrought with caution, bearish hedging activity, and pessimism, despite the fact that the major market indices have remained in positive territory for the year. This makes the entire expectational landscape notably different from some tenuous bull markets of the past, when complacency, contentment, or even euphoria ruled the roost. This past week's action, with the Fed decision and the subsequent market pullback, verified that a wall of worry is still very present in this market, which is reinforced by some oversold technical readings that are normally associated with serious bear markets as opposed to bull market pullbacks.

In Thursday's trading, the Desmond 90/90 Indicator showed up, indicative of a panic in the trading crowd. This reading simply means that 90% of volume and 90% of price action is negative. While not easy to stomach on a day where this transpires, a negative skew of this magnitude can mark a market turning point, as recent data from our Quantitative Analysis group show.

Another indicator we follow that reached a bearish extreme is the TRIN (Traders Index) also called the Arms Index - which registered a 2.99 reading on Thursday. This indicator measures the relative volume on declining vs. advancing stocks, and readings well in excess of 1.00 as registered on Thursday imply extreme oversold conditions.

Finally, Thursday saw odd-lot short selling (short positions of fewer than 100 shares per transaction) move to its highest daily reading since August 16, 2007. As you probably remember, that day proved to be a short-term market bottom as a panicked urge to sell off any and everything corrected itself with a renewed buying trend.

And it's not just small-time traders with trepidations toward the market. The latest Barron's Big-Money poll just published this weekend shows there has been a drop in bullishness among professional investors. In fact, 47% of those responding to the financial weekly's survey say they are bullish about the outlook for stocks through the middle of 2008. This is well below the 64% "bullish" reading from last fall's poll. Furthermore, a hedge fund manager survey from Greenwich Alternative Investments revealed that 50% of respondents were bearish as we moved into November. Over the past couple of years, such elevated levels of bearishness from this group has preceded strong market action.

This cautious sentiment, the propensity for the market to quickly reach oversold levels, bullish fourth quarter seasonality and the bullish implications of the third year of a presidential term all have me feeling sanguine about a bullish trend perpetuating through the end of the year. While there have certainly been some major blowups as financial engineering met financial reality for mega-cap names such as Merrill Lynch (MER) and Citigroup (C), pure consumer financial play MasterCard (MA) posted blowout earnings and the stock proceeded to soar. And the "meat and potatoes" economic news is far from grim.

To quote from Gene Epstein's Economic Beat column in this week's Barron's: "But you can at least say this about the economic news of the past week, with respect to both production and employment: Most of it occurred after the financial storm that began in August. And so far, it gives evidence of an economy that managed to weather that storm, even if that evidence is eventually revised down. And for all we know, it may even be revised up ... A key question has been whether the rest of the economy can survive the bust in housing. As was recently pointed out in this space, ('Housing Isn't Clobbering GDP,' Oct 22), it seems to have more than survived; it seems to have prospered. Last week's data now shows, in fact, that gross domestic product excluding housing grew at an annual rate of nearly 5% in the third quarter -- the highest rate of growth for GDP ex-housing since the expansion began. A look at the components of GDP growth again reveals that housing is hardly everything. Consumer spending grew at a respectable annual rate of 3.0%, curbed only by an increase in energy prices." This is not to dismiss the problems at Merrill and Citi, but I must also point out the potential that the Fed will continue to be under pressure to reduce rates to help keep these "too big to fail" giants afloat, which would be bullish for both the economy (particularly housing) and for stocks.

Of course, there are still some areas of market sentiment that aren't ideal. Options-purchase data as reported by the International Securities Exchange is not showing much fear. Even while the market was plunging, calls purchased (to open) outnumber puts purchased (to open) at a ratio of 1.71 on Thursday - I'd much rather see readings closer to 100. I will point out, though, that these various option volume ratios have been getting quite a bit of play from the bears lately, which I see as diminishing their contrarian value.

I'd like to see the CBOE Market Volatility Index (VIX) settle down a bit as well. Currently, it is still above the critical 20 level and atop its 32-week moving average. With the VIX at its current levels, the odds of additional volatility are heightened, creating an additional risk factor for the short term.

This week, earnings season continues to chug toward the light at the end of the tunnel, and economic data are fairly sparse. Additionally, I'd imagine Fed officials will be fairly quiet in the wake of last week's rate-cut announcement. So we may have a week without too much drama, unless crude decides to show off with a spike above $100 or there are more surprises on the credit front (but keep in mind the Fed will be lurking in the background should the mega-financial players begin to stumble too precipitously).

And now a few sectors of note...

Dissecting The Sectors

Sector

Alternative Energy Bullish

Sentiment: With regular unleaded stretching above $3.00 per gallon and crude oil eying the $100 level, it is no wonder that the idea of "alternative energy" has become fashionable of late. But this relatively new market segment hasn't yet been met with the approval of the options-trading crowd. During the past 20 trading days, equities in the alternative-energy sector have seen their average volatility-index reading spike 40.2%, their composite Schaeffer's put/call open interest ratios (SOIR) move higher, and their prices jump up 4.3%, a nice contrarian recipe for future success. What's more, SOIR for the PowerShares WilderHill Clean Energy Portfolio (PBW) is sitting within striking distance of a new annual high, providing another sign of skepticism on the group.

Outlook: The PBW has been a strong performer in 2007, tacking on nearly 40% and easily outperforming the broader market. In the last several sessions of trading, the index has hurdled previous resistance at the 24 mark; this level should now provide support for the fund. Individual securities to consider from the group include SunPower (SPWR) and Evergreen Solar (ESLR).

Sector

Small-Cap and Mid-Cap Momentum Bullish

Sentiment: Puts remain a popular flavor on the iShares Russell 2000 Index exchange-traded fund (ETF) (IWM), which reports a Schaeffer's put/call open interest ratio (SOIR) of 1.96. In other words, in the front-month series, there are nearly 2 open puts for every single open call contract. Additionally, puts are spread among several out-of-the-money strikes in the November and December series, providing a measure of options-related support. Among the small- and mid-cap momentum names we currently favor are Overstock.com (OSTK), Illumina (ILMN), and Chipotle Mexican Grill (CMG). The short-interest ratios are robust on all 3 stocks, weighing in at 8.9, 6.6, and 8.4, respectively.

Outlook: Though the Russell 2000 Index (RUT) breached the $800 level in last week's tumultuous activity, its long-term uptrend remains impressive, and support looms in the form of the index's 32-week moving average. The S&P 400 MidCap Index (MID) is mere percentage points shy of a new all-time high and is hugging its 10-month moving average. Concentrate on strong momentum, high-relative-strength names within the sector for the best profit potential.

Sector

Financials Bearish

Sentiment: The Schaeffer's put/call open interest ratio (SOIR) for the Select Sector SPDR Financial Fund (XLF) has fallen farther still since last week, dropping to 1.74 from 1.80 to register yet another new annual low. The composite SOIR for the brokerage sector, meanwhile, has edged slightly higher to 0.22, in the 9th annual percentile. The banking group's composite SOIR is reading 0.95, or lower than 81% of the past year's worth of data. Short interest on both the banking and brokerage groups has declined in recent months, suggesting rising complacency among equity investors.

Outlook:In Thursday's trading, the XLF swallowed a loss of more than 5% and was one of the worst-performing sectors of the day. Surprisingly, however, volume was far from climactic, meaning that rock bottom may not yet have occurred. Brokerage and banking names remain vulnerable to subprime exposure, a weak housing market, and the overall credit crunch. The XLF continues to underperform the broader market on a relative-strength basis and is trading near a 2-year low.

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