The second wave of this year's credit crunch has crashed ashore. Much was made of the fact that Friday's steep market decline came on the 20th anniversary of Black Monday, the day the Dow Jones Industrial Average plunged 22.6%. The coincidence certainly sets the market up for a nervous open Monday, but that's far from all investors have to worry about in the coming week. There are indications in the credit market that another round of unsettling action might be around the corner. The bond markets won't be the primary focus of next week's action, of course. A convoy of big earnings reports is headed down the pike, with fan favorite Apple ( AAPL) due to report results after the market closes Monday. Later in the week, we'll see reports from AT&T ( T), Boeing ( BA), Motorola ( MOT), Baidu ( BIDU) and Countrywide ( CFC). But following a wild week in the credit markets, Wall Street eyes will remain glued to indicators of fear and panic to determine if the financial system is on track for a repeat of the dark days of August. Friday's stock drop was one of several indications that investors have once again ratcheted back their appetite for risk. Traders will continue to watch the market for government bonds. Last week, two-month Treasury bills rallied the most since Sept. 11, 2001, according to Miller Tabak. This shows that investors have re-embarked on a flight-to-quality trade, perhaps betting that the economy is weaker than expected and that the Federal Reserve is likely to cut interest rates again. Emerging market stocks, after a long record run, have also emerged as a possible proxy for fear. These stocks were particularly hurt Friday, paving the way for that afternoon's U.S. market bludgeoning. While the Dow dropped 2.6%, the iShares MSCI Emerging Markets Index ( EEM) shed over 4% on the day. One popular exchange-traded fund tracking China, the iShares FTSE/Xinhua China 25 Index ( FXI), dropped over 6%. Volatility is likewise jumping. The CBOE Volatility Index, often called the fear index, added 24% Friday to a reading of 23, its highest reading in a month. Meanwhile, credit derivative indices measuring high-yield bonds, leveraged loans and asset-backed securities fell to near-August lows or beyond, said traders. Traders will be watching the banking and brokerage sector for clues to where the survivors may lie in another liquidity crisis. While Citigroup ( C) fell below its August lows this week on the heels of a dismal earnings quarter, other financial stocks have hung in. Goldman Sachs ( GS) fell 4.5% Friday, but remains 32% above its August lows. Any news on potential rescuers after this latest wave will be key for many investors as well. Indeed, many investors got worried when news emerged last weekend that the U.S. Treasury department had been involved in helping bring large banks together to rescue others that can't fund their off-balance sheet structured investment vehicles. JPMorgan Chase ( JPM), Bank of America ( BAC) and Citigroup agreed to be part of such an endeavor, though the so-called master conduit remains in the planning stage. But the hope for a white knight or a confidence-boosting bailout only served to remind investors that "a lot of banks have a lot of risk and exposure to the SIV sector," says Christian Stracke, analyst at CreditSights. "You can't just sweep this crisis under the rug." Friday's news that Citigroup was able to buy some time with a wave of 90-day funding for its SIV didn't help matters, and only reinforced the tone of desperation. As David Merkel, an investment consultant and contributor at RealMoney.com, said in a previous column, "From a trader's perspective, when you're dealing with companies facing big balance sheet issues, you're trying to judge how bad shape the company's in and if it's playing for time. If things are bad, you
the company write down a little, make it look like you put down a lot and play for time. If things are good, you mop up and move on." It looks like the time for mopping up and moving on is not here yet.