Financials Continue to be Major Overhang

Although the gains weren't that large, the major indices were able to end the week on a positive note as investors stepped up to buy mid-day weakness and close the market well off the lows of the session on Friday. Following the previous day's strong late-day rebound, indications were for some follow-through to the upside early in the morning. In addition to the boost in sentiment that the market got on the heels of that reversal, the mood was also bolstered by in-line earnings results from INTC, news that BAC would be getting another $20 billion from the government to assist in its acquisition on Merrill Lynch, reports that the Senate would release the second half of the TARP funds to the Treasury, further details regarding the Democrats' fiscal stimulus package, and not-as-atrocious-as-expected quarterly results from BAC and C.  

Still, even though the index futures faded off their early morning highs, the market was able to gap higher once the opening bell rang. Unfortunately, however, the indices struggled to hold on to their early gains as staples, industrials, tech and energy pulled back from their initial highs. It was financials, though, that really acted as the biggest weight as the day got under way, as that sector reversed, moving straight down as the day got under way. It wasn't long, however, before the rest of the market began to lose steam, and about an hour into the day, the move to the downside really began to pick up.  

Fortunately for the bulls, just when it looked like the oversold rally which began on Thursday was doomed before it even really began, stocks did an about-face, and even though there was no apparent catalyst, they began to work their way off what would turn out to be the lows of the session. For the next 3.5 hours, the indices, as well as each of the major sectors, worked their way steadily higher. Even financials was able to pare its losses despite the dismal action in BAC and C.  

By the close, the indices were sporting gains, on average, of 0.92%, on breadth that was just shy of 5:3 to the positive and volume that, while lighter than Thursday, was well above what we've saw as the market pulled back. There are plenty of theories about the why and wherefore behind Friday's reversal (including short-covering ahead of the Obama inauguration next Tuesday and options expiry, among others), but the important thing is that the market was able to see some upside follow-through to Thursday's hammer close.  

The major overhang right now is the financials, and without that group acting better, it's going to be a tough row to hoe if this market is really going to recover from the ugly start to the year and begin making some progress to the upside. We'll see how it goes, but at the same time, there were many traders who were caught off guard by the strength we saw at the end of last year, and may be anxious to get another chance to put some of their capital to work. We're also still oversold here, and there's room for some upside as we move forward. The key, though, will be to see how buyers act when, and if, we move back to overhead resistance levels.  

Let's go to the charts.  (Click images to enlarge) 

The Nasdaq moved higher during Friday's session on decreasing volume. The two-day bounce has helped, but this chart remains a precarious position from a technical perspective

 

The S&P 500 edged higher during Friday's trade on decreasing volume. Despite the two day bounce, the index remains vulnerable to further weakness as it remains below the 50dma.  

   

The Russell 2000 notched minor gains during Friday's session as it tests resistance levels. The index closed just below its 50dma, and the bulls will need to overcome this level next week to keep the momentum to the upside going.  

     

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