Ahhhh, the week of Thanksgiving. Trading is light, economic announcements are few, and investors can take a break while their thoughts turn to giblet gravy and time with family and friends. Or so is typically the case. The bears came ready to play this week, and didn't want any holiday respite to detract from their business at hand. The bulls made a violent 11th-hour effort on Tuesday, but it was back into the red early Wednesday when rumors of an intra-meeting rate cut proved to be wildly exaggerated. The bulls came back swinging on Friday, with the market staging a steady rally throughout the shortened session. But by the week's close midday Friday, the major market indices had broken their 6-year winning streak for Thanksgiving week. The Dow Jones Industrial Average (DJIA) and the Nasdaq Composite (COMP) both lost roughly 1.5% for the week and the S&P 500 Index (SPX) tripped 1.2% lower.

As I mentioned in last week's column, I don't know whether we've seen the sort of dramatic moves necessary to form a short-term bottom from which a convincing rally can launch. Typically, one has to see more signs of outright despair before buying can begin again in earnest it's always darkest before the dawn. Volume hasn't been as climactic as I would like to see (this may have something to do with the time of year), short-selling activity hasn't ramped up sharply, and activity in the CBOE Market Volatility Index (VIX) has been relatively subdued (more on that later).

But this past week, I did see some glimmers of hope that a bottom could be occurring sooner rather than later. In Tuesday's rocky trading, marked by a wide intraday swing and preoccupation with the "will-they-or-won't-they" Fed, volume on the S&P Depositary (SPY) receipts hit nearly 415 million shares. That's the closest the exchange-traded fund (ETF) has come to matching the volume seen at the August 16 nadir when 547 million shares changed hands and the fifth highest ever. While I'd prefer to see a spike that took out the August 16 record, one must consider that November 20 was just two days before the Thanksgiving holiday and Thanksgiving week volume tends to slow appreciably. In this context, Wednesday's seemingly light volume of 259 million becomes less than shabby.

Last week's pullback proved to be a perfect storm for the S&P 500 Index (SPX), as it also moved low enough to test its 80-week moving average. As you recall, this trendline marked a short-term bottom for the S&P (and for the market) in July 2006 and August 2007 as well as in 2005 and 2004. It has been an important bastion of support and I didn't expect to see a reprieve from the recent selling pressure without a visit to this trendline. Making this level even more significant this time around is that it also defines the threshold between positive and negative territory for 2007. Wednesday's intraday low in the S&P was 1,415.64. The index's 2006 close was 1,418.30.

And to add to this near perfect confluence of indicators, the drop in the S&P reached a precise 10% decline from its October 11 high to its November 21 low. The Nasdaq Composite also reached a 10% correction from its highs, while the Dow Jones has come in just shy of the 10% demarcation. The SPX's pullback to the important 80-week moving average, which is coincident with a 10% correction from the recent highs and marks a break-even level for 2007, puts the index at a critical juncture as we move into the final weeks of the trading year. This past week's low is certainly a level from which a year-end rally could begin to establish itself, and it has got to be encouraging that we rallied sharply off this level in Friday's abbreviated session.

Data from the International Securities Exchange, or ISE, also began to show signs that complacency may be breaking down. As I noted last week, the all- securities call/put ratio at the ISE hit 67.85 on Friday (November 16). Readings as low as this are pretty uncommon counting this latest one, there have been 22 going back to the beginning of 2006. And many of these readings have occurred in clusters.

My colleagues, Bob Becks and Joseph W. Sunderman, took a look at the implications of a low ISEE call/put ratio (below 90). In their quantitative study, they eliminated signals that occurred within 20 days of the first signal, due to the tendency of these extremely low call/put ratios to occur in clusters. That leaves a total of seven unique signals. Ten trading days after these signals, the SPY has been positive 86% of the time with an average gain of 1.1%. Thirty days out, the SPY was positive 100% of the time, with the average return being 3.2%. The 90-days period following such a signal is really impressive. The SPY was in the black 100% of the time with an average return of 9.1%. Unless we're transitioning to a bear market, which I highly doubt, this study suggests that it's a good time to be long the market, no matter how gut-wrenching it may be on a day-to-day basis.

Another sign of growing concern among the options players can be seen in the 15-day moving average of the CBOE put/call open interest ratio. This indicator is climbing toward levels last seen in first and third quarters of 2007, when the market was hovering at its lows for the year. We may finally be seeing some capitulation among investors, adding another brick to the wall of worry this market can use to claw its way higher.

One dissenter to this growing crack in the complacent armor was the VIX, which was little changed even while the market moved defiantly into losing territory. In fact, the supposed "fear barometer" has shown little signs of alarm for a few weeks now, preferring instead to shuffle sideways. It has yet to make a significant move above the 30 level or come within sniffing distance of its mid-August peak.

However, the VIX action presents some very interesting possibilities. Its continued inability to move below the 32-week trendline is bearish, as we've pointed out before. But I wonder whether the fact that the November spike has fallen short of the August spike might actually be bullish in its implications, in the sense of a "non-confirmation" of the pullback, rather than the conventional view that this is a bearish indicator of complacency. This interpretation would only make sense if you felt the VIX represented smart money, an evolving conclusion that we at Schaeffer's have reached over the course of this year. Note that you could consider the VIX spike in the first quarter to be a non-confirmation relative to the spike in the second quarter of 2006, as it fell shy of the 2006 peak. The spike to higher VIX highs in August then "confirms" the bearish trend, and by that reasoning (assuming the VIX has, in fact, peaked) the current spike is another non-confirmation with bullish implications.

I do feel the bears are keeping a watchful eye on the Fed every step lower that the market takes Citigroup's (C) break to new annual lows isn't helping matters for financials or for the market as a whole. The five-year yield continues to spiral to new lows, putting additional pressure on Bernanke and his cohorts. And despite the protestations of certain Fed officials earlier this month, the group will be forced to act if market conditions get much worse from here. The next policy meeting is scheduled for December 11; if we don't see a rate cut from that meeting (if not before), the market will be in for some severe disappointment, technical support notwithstanding. But the risk posed by a foolish and impotent Fed aside, I'll reiterate what I said last week:

"...I see the risk to the bullish case as a 'slow bleed'; the bearish risk would be more like 'an explosive rally to new highs,' and under this scenario I want to be a bull despite some short-term concerns..."

This week, we finish November with consumer-confidence numbers on Tuesday, and preliminary GDP data and new home sales on Thursday. On the earnings block, more retailers take the stage, such as Staples (SPLS) and Aeropostale (ARO). We'll have an early indication as to how successful retail sales for "Black Friday" and "Cyber Monday" were amid this time of consumer uncertainty. Additionally, several Fed officials will be speaking and will perhaps provide some clues to the bank's short-term plans. My suggestion to them would be: "If you don't have anything to say that implies a forthcoming rate cut, don't say it."

And now a few sectors of note...

Dissecting The Sectors

Sector

Metals Bullish

Outlook: Southern Copper (PCU) and BHP Billiton (BHP) appear to be bottoming out around intermediate-term support their 160-day and 80-day moving averages, respectively - while remaining propped against a wall of worry. Between the pair, there are just 4 "buy" ratings on Wall Street, and 9 "hold" ratings, leaving wide open the possibility for upgrades. Short interest is robust on PCU, at 7 times its average daily volume, and Schaeffer's put/call open interest ratio (SOIR) for both PCU and BHP reveals a preference for the put side. PCU currently shoulders a Schaeffer's put/call open interest ratio (SOIR) of 1.11; BHP boasts a SOIR of 1.07. Looking at gold, the $800 level was overcome once again in last week's trading, as investors moved back into the malleable metal. A sprint to $1,000 could be in the metal's future. Barrick Gold (ABX) is fresh from a retest of its 80-day moving average; Newmont Mining (NEM) continues to hug support at its 10-week moving average.

Sector

Small-Cap and Mid-Cap Momentum Bullish

Outlook: The Schaeffer's put/call open interest ratio (SOIR) for the iShares Russell 2000 Index (IWM) exchange-traded fund (ETF) edged fractionally higher last week, hitting 1.88. In the front three-months series combined, puts are trouncing calls nearly two-to-one. As this pessimism unwinds, the small-cap-centric fund could be rewarded with some additional buying power. In the front-month December series, put open interest is notably heavy between the out-of-the-money 71 and 75 levels. Over the short term, these below-the-surface puts could serve as options-related structural support. From the small- and mid-cap arena, we continue to like Chipotle Mexican Grill (CMG), Sunpower (SPWR), and Priceline.com (PCLN). The short-interest ratios on all three stocks are robust, at 8.4, 6.9, and 8.4, respectively. The Russell 2000 Index (RUT), meanwhile, continues to hold atop its 32-month moving average, which has not been violated on a closing basis since May 2003. Meanwhile, the S&P 400 MidCap Index (MID) is trading atop its 20-month trendline, which could serve as a springboard to launch the index higher. Continue to focus on strong momentum, high-relative-strength names within the sector for the best profit potential.

Sector

Financials Bearish

Outlook: Given everything that has happened in the financial arena of late the latest being Citigroup's (C) trek into new-low territory - I'm guessing the sector will have to be hated a lot before rock bottom can be considered. And I don't think we've seen the type of overwhelming negative sentiment that would coincide with a bottom. Case in point: the Schaeffer's put/call open interest ratio (SOIR) for the Select Sector SPDR Financial Fund (XLF) remains new annual lows, coming in at 1.50 last Friday. Composite sector SOIR readings for savings-and-loan companies and for banks are indicative of speculator optimism as well, ranking in the 21st and 0 percentiles, respectively. We still continue to lack climactic volume typically registered at a market bottom. The XLF hit another new annual low last Wednesday, but volume is still below mid-August levels. Overall, if the financials in fact haven't bottomed yet, a major portion of market will continue to struggle.

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