Train Wreck By The End Of October?

by John Nyaradi

By the end of October, we will know if global markets managed to avoid a financial train wreck.

Major U.S. Indexes like the S&P 500, (SPY) Dow Jones Industrials (DIA) and Nasdaq 100 (QQQ) face significant jeopardy as the battle to save Greece enters its most dangerous phase yet. We’ll discuss the macro issues in a moment but first take a look at the technical picture.

On My Wall Street Radar

chart courtesy of stockcharts.com

In the point and figure chart above (click to enlarge) we can see that the S&P 500 (SPY) is still on a “sell” signal with a downside target of 1010.

However, the recent rally has returned the short term price action higher to significant resistance at the 1180-90 level and demarcated by the red Bearish Resistance line. These major trend lines tend to act as hard walls and so a break above this level would argue for a rally to higher levels, while continued failure here would argue for lower prices ahead.

The Economic View from 35,000 Feet

Last week’s economic news at home was mixed as factory orders declined for the second time in three months, missing expectations, and Fed Chairman Bernanke painted a gloomy outlook of slow growth and high unemployment during testimony on Capitol Hill.

Weekly first time unemployment claims rose on Thursday, while better news for the labor market came on Friday with the economy generating a better than expected 103,000 new jobs and topping last month’s dismal 57,000. However, 100,000 new jobs is nowhere close to enough to put a dent in unemployment and so overall unemployment stayed stagnant at 9.1%.

But the big news was all about Greece and the ongoing struggle to avoid default and a cascading financial train wreck across Europe and around the world.

It’s a fast moving, fluid situation and here are some of the highlights and things to watch out for this week:

1. Sunday, French President Sarkozy and German Chancellor Angela Merkel met in Berlin to see if they can come to agreement about how to handle a Greece bailout and any resultant “haircut.” They came out of the meeting saying they were “in full agreement” but offered no details, which is certainly troubling, saying that they’ve agreed on a plan to recapitalize European banks and will have it all figured out by yet another European summit scheduled for October 17-18.

2. Credit ratings downgrades hit Europe hard last week with Moody’s downgrading a slew of banks in England and Portugal including big names Santander and RBS and Fitch downgrading Italy and Spain. Rumors abound that France could soon lose its AAA credit rating, as well.

3. Dexia Bank (DXBGF.PK) is scheduled to go under and be demolished by the governments of Belgium and France as it succumbed to the European crisis. This is a particularly chilling development as Dexia earlier passed the European “stress tests” and so current events cast a long shadow on the strength of other European banks.

4. Greece apparently now has enough capital to make it until mid-November by most estimates (some say the end of October) and the decision about paying out another round of bailout funds should be made by the end of October, twenty one days from now.

5. Bloombergreports that German Finance Minister Wolfgang Schaeuble said that Greece might have to do even more debt reduction than has already been identified and that the debt crisis offers a high risk of intensifying and spreading.

6. Treasury Secretary Geithner says U.S. exposure to Europe is negligible but the Wall Street Journalsays it could be $640 Billion or more.

Perhaps most ominously, Slovakia’s Freedom and Solidarity party says it won’t vote for the European Financial Security Facility on October 11th when it comes up for a vote in that country’s Parliament. Failure here could potentially tank the entire bailout package as a unanimous vote of all 17 euro nations is required for approval.

Finally, in what could be considered more “normal” news, 3rd Quarter Earnings season gets underway this week with Alcoa (AA) reporting on Tuesday. A number of profit warnings and earnings downgrades have been released and so this will likely prove to be an interesting earnings season, to say the least.

What It All Means For Stock Market and ETF Investors

What this all means is that we are at a watershed point for the future of the U.S. and global economy. If Europe can avoid a financial train wreck in Greece, or at least put it off for awhile, we could have a powerful rally as markets are oversold and we’re entering the traditional “six best months of the year” when market seasonality and “The Halloween Indicator” typically trigger a rally going into the end of the year and the start of 2012.

Perhaps it will turn out that October has slain another bear.

However, if Greece goes under, then the financial train wreck that they’ve been fighting so hard to avoid could finally be at hand.

Wall Street Sector Selector remains in the defensive mode, expecting lower prices ahead.

This Week’s Business and Financial News and Economic Reports

Business and economic reports this week include the September NFIB Small Business Index on Tuesday, FOMC meeting minutes on Wednesday, jobless claims on Thursday, and the most important reports of the week come Friday with September Retail Sales and October Consumer Sentiment.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.