Winter descended on Wall Street this week, as did some selling, although the latter was not as ferocious as the former. Still, like the snow, major stock proxies did fall, breaking their string of weekly gains at eight.

For the week, the Dow Jones Industrials shed 2.8%, the S&P 500 fell 2.6% and the Nasdaq Composite lost 3.8%.

Given the market had rallied for eight weeks previously, consternation about the setback suggests sentiment is not as upbeat as many contend.

Yes, bullish sentiment rose again in the weekly Investors Intelligence poll, but there also were spikes in defensive put buying, one-day Arms Index readings, and the CBOE Market Volatility Index this week.

The VIX rose 5% for the week, despite dipping 4.7% to 32.68 on Friday (after trading as high as 35.58 intraday). That may indicate more short-term weakness ahead but also suggests rising fear among traders.

Au Contraire

The question, of course, is whether such fears are justified or a sign that investor sentiment, which is often a contrarian indicator, remains overly cautious. Mutual fund investors continue to spurn shares, taking $2.1 billion out of equity funds for the week ended Dec. 5 after putting a modest $4.4 billion into such funds in November (the first month of inflows since May), according to AMG Data Services.

But while retail investors are still hesitant, fearing the post-Oct. 9 rally will prove to be another false dawn, some market professionals continue to see opportunities in stocks.

"We're still bullish," said Kevin Depew, technical analyst at Dorsey Wright & Associates. "Some short-term indicators -- such as the percent of stocks above their 10-week moving averages -- got extended, so we would not be surprised to see a little more selling. But that would be an opportunity to add to positions as stocks pull back to support vs. an outright sell indicator."

Indeed, it was not lost on technically inclined observers that major averages rallied Friday after breaching technical support/psychological important levels of Dow 8500, S&P 900, and Nasdaq 1400. (As discussed here , the rebound was aided by the resignation of Treasury Secretary Paul O'Neill, who was viewed as an obstacle to additional fiscal stimulus.)

The bullish percentage indicators favored by Dorsey Wright & Associates are "just now getting to normalized conditions vs. being skewed to oversold," Depew said, noting the NYSE bullish percentage fell below 30% in October, a sign of the market being washed out. (The NYSE bullish percentage indicator was created by A.W. Cohen in 1955, and is calculated by dividing the number of NYSE stocks trading on new point-and-figure buy signals by the total listed on the exchange. Point-and-figure charts are pure price charts that plot supply and demand for a given stock or index, without factoring in time or volume.)

Thursday afternoon, the indicator was at about 50%, "still well below overbought at 68%" and above, he said. "The period where you can blindly follow strong sectors is gone but we still have room to the upside."

A Fairer Market

After the five-session selloff culminating on Thursday, the analyst described equities as being in "much more of a fair market environment," with opportunities for both longs and short-sellers.

There were plenty of opportunities for short-sellers this week and seemingingly even more early Friday as shares tumbled following a much weaker-than-expected unemployment report. The government said nonfarm payrolls shrunk by 40,000 in November, the largest decline since February and belying expectations for a rise of 35,000. Meanwhile, the unemployment rate rose to 6%, the highest level since April, and vs. expectations for a climb to 5.8% from 5.7% in October.

But after trading as low as 8501.86, the Dow recovered to close up 0.3% to 8645.7, the S&P gained 0.6% to 912.22 after trading as low as 895.96, while the Comp rallied 0.8% to 1422.40 vs. its nadir of 1391.10.

In addition to O'Neill's resignation, shares were aided Friday by IBM's ( IBM) buyout offer for Rational Software ( RATL), which spurred hopes for more consolidation in the tech sector, and better-than-expected earnings from National Semiconductor ( NSM). (Despite some positive comments from National Semi, Intel ( INTC) and other chipmakers, the Philadelphia Stock Exchange Semiconductor Index tumbled 11.3% this week.)

Until Friday, All News Was Bad News

Technically speaking, the week had a decidedly bearish tone. Notably, major averages posted weekly reversals, characterized by higher highs than the previous week -- hit intraday Monday -- as well as lower lows, established Friday morning. Many observers believe the market's intraday highs Monday of about 9043 for the Dow, 954 for the S&P and 1521 for the Comp will prove to be the high watermark for the post-Oct. 9 rally.

Monday's session augured trouble, as big early gains evaporated and major averages ended mixed with a negative bias. A weaker-than-expected Institute for Supply Management manufacturing index was credited in spurring the selling, but some observers said the market had simply become overextended and overdue for a decline.

The setback picked up steam on Tuesday thanks to some cautious comments from AOL Time Warner ( AOL) and weak November sales data from Ford ( F) and General Motors ( GM).

In what would become a trend -- and a notable change from recent weeks -- the decline came despite positive headlines from corporations such as Merck ( MRK) and Texas Instruments ( TXN)

The selloff continued Wednesday amid disappointing outlooks from firms such as Disney ( DIS) and Hewlett-Packard ( HPQ), and despite solid economic data; specifically, positive factory orders for October, the ISM's nonmanufacturing survey and an upward revision to third-quarter productivity.

Spurred partly by optimistic comments from Microsoft's ( MSFT) CFO, major averages did close well off their session lows Wednesday, prompting optimism the decline had run its course.

Such hopes were dashed Thursday. Shares tumbled sharply following cautious comments from Gateway ( GTW), raised prospects for a bankruptcy filing by UAL ( UAL), and despite a 50-basis-point rate cut from the European Central Bank and increased guidance by Advanced Micro Devices ( AMD).

That set the stage for Friday's session, in which politics and Wall Street collided, with apparently beneficial results for stocks.
JRaess: Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task. JRaess: Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.