BANKS LEAD STOCK RALLY ON HOPE RESCUE PLAN IS NEAR PASSAGE -- BONDS AND GOLD ARE ON THE DEFENSIVE -- VIX WEAKENS

STOCKS ATTEMPT RALLY ... It was exactly a week ago that the stock market started to rally on news that a massive government rescue plan was in the works. That led to two strong updays at last week's end on huge volume. The fact that major stock indexes scored an upside weekly reversal on record volume raised the strong possibility that a "climax bottom" had been completed. Climax bottoms usually mark the end of a capitulation phase and the start of a bottoming process. Not necessarily a final bottom, but a bottom of some type. After selling off over the first three days of this week on below average volume, the market is rallying sharply today. If it can hold onto to its gains, and especially if volume picks up, that will be a good sign. The hourly bars in Charts 1 and 2 show the Dow Diamonds and the S&P 500 SPDRS rallying today after retracing about two thirds of last week's rally. While an up day today would be encouraging, the indexes really need to clear last week's high to confirm that a bottom has been put in. A lot is riding on the passage of the government's rescue plan.

Chart 1

Chart 2

BANK INDEX CONTINUES TO TEST 200-DAY AVERAGE ... Banks are leading the day's rally. The daily bars in Chart 3 show the PHLX Bank Index trading just below its 200-day moving average (which it closed above last Friday). The BKX needs to regain that line if last week's upside momentum is to be restored. Chart 4 shows the Financials SPDR trading 2.6% higher today after retracing half of last week's gains. The XLF is trying to regain its 50-day line. Needless to say, the financials hold the key to any potential market bottom.

Chart 3

Chart 4

BONDS AND GOLD SELLOFF ... Chart 5 shows the 7-10 Year Treasury Bond ETF trading to the downside today. The sharp slide in bond prices started with last week's stock rally. Chart 6 shows the streetTracks Gold ETF backing off from its 200-day average. Some of the safe haven bid in gold is being unwound today. Most other commodities, however, are modestly higher as traders feel more optimistic about the market and the economy (Chart 7).

Chart 5

Chart 6

Chart 7

VIX MAY HAVE PEAKED ... The CBOE Volatility (VIX) Index surged last week to the highest intra-day level since October 2002. Last Thursday's downside reversal day, however, may have signalled a top in that contrary indicator. The VIX is trading 6.5% lower today as the market is rallying. A lower VIX is positive for stock prices.

Chart 8