First Coverage's weekly market sentiment report is still pointing to a bullish market (First Coverage). This week has seven sectors rated bullish, with three, including basic materials, consumer goods, and energy (oil and gas) rated neutral.

The weekly sentiment change has basic materials moving more bearish from last week with a 10.9% decline in sentiment (although still neutral), while health care has become more bullish. The financial sector has also failed to roll over, indicating that the sell-side has still not yet gone bearish, even with the big run-up in this sector over the last six months.

A glimmer of good news touched the junior oil and gas sector Tuesday in the form of a takeover offer. Sure, one transaction does not make a trend, but it is enough to rethink the fortunes of distressed energy companies.

Polar Star Canadian Oil and Gas Inc., indirectly owned by Teachers Insurance and Annuity Association of America, purchased TUSK Energy Corp (TSGYF.PK) for $257-million. It may not seem like much, but it translates into a 150% premium compared to its closing price the previous day.

For investor's sake, let's hope that Wellington West Capital's list of top picks for 2009, fares better than last year's version that declined on average more than 50%.

On Monday, Wellington West analysts joined forces to publish a group of nine stocks from five sectors that are expected to outperform their respective benchmark indices this year.

A steep decline in share prices, week commodity prices and tight credit markets provide the perfect conditions for consolidation in the junior oil and gas  sector, says Scotia Capital analyts George Toriola. He  points out in a recent research  note that several junior oil land gas companies have seen share price declines of 70%, while the TSX S&P energy index has dropped 50% since the beginning of the the third quarter.

Mr. Toriola says in a note to clients:

Scotia Capital says the junior oil and gas sector is under threat from a pullback in commodities prices, leading the research firm to reconsider its forecasts for several companies.

“We continue to like NuVista Energy Ltd. (NUVSF.PK), Iteration Energy Ltd. (ITXFF.PK) and Rock Energy Inc. [TSX:RE],” analyst George Toriola said in a note released Tuesday, noting that enterprise value/cash flow multiples are less than the group average of 5.6x. For Iteration in particular, he notes Iteration will likely run out of room in its C$275-million credit facility but will trim its capital spending program. “We believe the course of action is prudent,” he said.

Oil industry mergers in the first half of this year were down significantly – to C$6.6-billion from C$23.8-billion in the first half of 2007 – according to a survey by Sayer Energy Advisors. That’s a 72% drop, ending a succession of rising numbers over the last five years.

Sayer also said in a note to clients that the number of large transactions (over C$5-million) fell to 70 from 110, and there were no deals at all topping C$1-billion, compared to four deals worth a total of C$15.9-billion in the same period of last year.