When you look at stock market performance at the mid point of January, you have to wonder what could possibly incite higher stock prices.

Take out gold, and virtually every sector has sold off. Reflecting a shift in investor sentiment away from the normal slowdown / recession scenario to the this-time-is-different scenario.

Writedowns by Citigroup, Merrill Lynch and in Canada, CIBC, don’t help. And justify yet another pound of flesh being extracted from share values. Looking over the abyss, investors are asking what will turn this around?

One thing we know is that at mid-January, fear is driving the market. We also know that standing at the edge of the abyss is a template for clarity. If clarity gains momentum, sentiment can shift back to the middle quickly.

Take Citigroup as a case in point. Investors looked at the write downs as a glass half empty. You could say that Citigroup was airing its laundry, and was most likely, “airing” on the side of caution.

For that moment of clarity, we can thank the new era of corporate governance and the fact that on December 11th, Citigroup named Vikram Pandit as CEO and appointed Sir Win Bischoff as Chairman.

Neither of these men has responsibility for the current mess at Citigroup. So their role is clear; communicate a worst case scenario, leverage the news to slash jobs and cut the dividend (Citigroup slashed its dividend by 41% from US 54 cents to US 32 cents per share), find new sources of capital and begin to clean up the balance sheet.

To that end, Citigroup has lined up US $12.5 billion in new investments from sovereign wealth funds and existing shareholders. Including US$6.88 billion from the Government of Singapore Investment Corp. in exchange for 4% stake in the company.

Other investors included Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, Citigroups largest shareholder Prince Alwaleed bin Talal of Saudi Arabia, and former chief executive Sanford Weill and his family foundation.

All tolled Citigroup raised US$ 20 billion in new capital over a period of two months. Same story, albeit smaller numbers, with Merrill Lynch (about US$15 billion) and CIBC (CDN$2.7 billion). Demonstrating, once again, the resiliency of big financial institutions to access capital when necessary.

January was most likely, the pivotal month for write downs. It will have been six months since the sub prime market began to unwind. More than enough time for managements to evaluate their exposure write it off on last years books.

Next comes the US Federal Reserve. Chairman Bernanke will first jawbone the markets, and then take definitive action. Through the first half of the year, the Fed will orchestrate a coordinated three pronged blitz with other central banks. This will include; 1) frequent and significant rate cuts 2) infusion of liquidity and 3) moral suasion intent on easing credit restrictions. The objective will be to shift investor sentiment, not only for those in the financial markets, but for consumers looking to enter the housing market.

This will likely stabilize stock prices. It will not likely stimulate share values. Replacing fear with clarity means you begin to focus on the outlook for earnings growth. And that’s not likely to kick start until the third quarter. The equity markets will start to take notice in the second quarter. Financial institutions will likely lead that parade.

In the meantime, we have a period where share values relative to expected earnings look relatively cheap. Option premiums have risen as a result of the uncertainty. The MX Implied Volatility Index (MVX) is at 24.75%.

The MVX measures the level of option premiums on the iShares CDN S&P/TSX 60 Fund (symbol XIU). At these levels, MVX is telling us that options are relatively expensive. And since MVX tends to be a barometer of option premiums across the board, there are some interest option writing opportunities in the market. Especially if you think that Canadian stocks will tread water through the first quarter.