Weekly Market Review/Preview

The short-term reprieve that I mentioned last week came to fruition this week as the financial sector, oil prices and better than expected earnings reports help to push the market higher.

For the week the Dow, S&P, NASDAQ and Russell 2000 finished the week higher at 3.6%, 1.7%, 2.0% and 2.7%, respectively

The financial sector led the way lower on Monday after news was released over the weekend of a collapse in Indymac.

It was the second-largest banking failure in U.S. history, and its collapse can be viewed as a cautionary tale: Not just of how America recklessly embraced subprime mortgages, but of how these questionable home loans have ripped through the wider economy, shredding confidence in the markets and inciting a global credit crisis.

As a result the financial sector was hit with one of its worst one-day declines in over ten years losing 6%.

The declines deepened Tuesday and the fear among traders was palpable. The major benchmarks had pushed into short-term “very oversold” levels not seen in quit some time.

Concerns over sustainability of Fannie Mae and Freddie Mac were also heightened, but concerns were quickly quelled after Bernanke and Paulson’s testimony in front of Congress at the beginning of the week.

A rescue proposed for mortgage finance giants Fannie Mae and Freddie Mac is “needed to respond to market concerns and increase confidence” in the government-sponsored firms, US Treasury Secretary Henry Paulson said Tuesday.

Paulson, testifying before the Senate Banking Committee, urged lawmakers to give speedy approval to a plan to allow the US Treasury to buy equity in the two firms to boost their capital along with other measures to raise confidence.

The news along with a sharp decline in oil prices and the short-term “very oversold” state of the market led to a rally Wednesday that would carry into options expiration.

When I state a decline in oil prices I probably should point out that this past week was witness to the largest weekly decline in crude prices ever.

Oil prices settled at $128.88 on Friday — well below its trading record of more than $147 a week earlier.

“It’s too early to say we’ve seen the worst of it,” said Tom Kloza, publisher and chief oil analyst of the Oil Price Information Service in Wall, N.J. “We would be Pollyannish if we believe one week represents a trend.”

While markets rallied this week, the big question is was it the start of a sustainable advance or just a bear market rally.

Technically speaking, on a short-term basis the major market stalwarts (Dow and S&P 500) have pushed back into an overbought state. Typically, this type of reading dramatically increases the probability of a short-term decline (1-3 days).

Also, the trading day following options expiration is historically bearish. Furthermore, on a seasonal basis the 14th, 15th, and 16th trading days of July (Monday, Tuesday and Wednesday of next week) are by far the weakest trading days for the on a historical basis.