What started looking like another down day at the hands of Europe's sovereign debt catastrophe turned positive late in the trading session on news that China may purchase large amounts of Italian sovereign debt. Those late-breaking headlines sparked the S&P 500 and the Dow Jones Industrial Average to respectable gains of just under 1% while the Nasdaq popped 1.1%.

Market Stats

China, with trillions of dollars in foreign currency reserves, is looking to spend some of that cash and has previously shown no fear about gobbling up sovereign debt from some of the world's largest, but most fiscally-challenged economies. Already one of the largest holders of U.S. and Japanese bonds, China may make for a strange bedfellow for Italy, but then again, not really. Remember, yields on Italian sovereign debt surging in the past month, finding buyers has become a challenge.

The Financial Times reports that Italian officials traveled to Beijing a couple of weeks to ago to meet with their counterparts from China Investment Corp. and China's State Administration of Foreign Exchange. Last week, officials from China Investment traveled to Rome. With a debt-to-GDP ratio approaching 120%, the second-worst in the Eurozone behind Greece, Italy may also be shopping stakes in state-run companies to China.

Not surprisingly, that would include Eni SpA, Italy's largest oil company, according to the FT. Still, these talks appear to be in the nascent stages and China is not believed to currently be a major holder of Italian debt, but the news was enough to send stocks rallying into the close. Stocks are one things. The spreads on Italian bonds versus German bunds are another and very wide I might ad.

Italian Bond Spreads

Even there is good news on the horizon for Italy, and that is a ''big'' maybe, investors still have to deal with Greece. The Mediterranean country has done little to assuage investors that it can skirt default and the chance of a Greek default sometime in the next five years have surged, according to Bloomberg News. Credit default swaps to protect Greek debt have blown out. On Friday, the upfront cost of insuring $10 million Greek debt for five years was $5.5 million. Today it was $5.8 million, according to CMA.

A Greek default could and probably should happen much sooner than five years. Over on Intrade, the financial predictions market, you can buy contracts that wager on Standard & Poor's to rate Greece as in default before midnight Dec. 31. Trading at $6.50 per contract, that implies a 65% chance Greece will default before year-end.

Greek Default Odds

In one Bloomberg story I came across today regarding the European mess, an analyst astutely compared the situation in Europe to a firing line where things will go from Greece to Italy to Spain and so forth. Unfortunately, France is in that firing line.

Allow me to preface what follows by saying that I got an email from a reader a while back that stated I am anti-French. I am not. If I were anti-French then the amount of time I have spent in France is downright odd, but I digress. The fact is France's three largest banks, BNP Paribas, Societe Generale and Credit Agricole, could see their credit ratings pared by Moody's as soon as this week.

All three banks currently have investment-grade ratings. BNP Paribas and Credit Agricole would probably see their ratings taken down one level while SocGen would probably go down two notches. Bloomberg reported on Sunday. If these downgrades do materialize, that is very bad news for the iShares MSCI France Index Fund (EWQ). On an intraday basis, the ETF touched prices not seen in over two years. Financials account for over 15% of this ETF's sector allocation. Draw your own conclusions from there.

France ETF Chart

Here in the U.S., there was some M&A activity in the tech sector worth noting. California-based Broadcom (BRCM), the maker of chips for cable boxes and mobile phones, among other gadgets, will dole out $3.7 billion in cash for NetLogic Microsystems (NETL). NetLogic surged 51% on volume of 46.8 million shares. That compares with average daily turnover of 1.5 million shares.

Broadcom is paying $50 a share for NetLogic, a 57% premium to where the acquired company's shares closed on Friday. That $50 also represents a substantial to premium to NetLogic's all-time high, which was just over $43 before today.

That is arguably a rich premium, but Broadcom did say the deal, which is expected to close in the first half of next year, will add to 2012 earnings by 10 cents a share. Plus, it's pretty obvious to see why Broadcom wanted to bring NetLogic into its fold. Not only does NetLogic make chips for smartphones, it is also a supplier of chips to Apple (AAPL) for the iPad, the world's most popular tablet device.

NetLogic Chart

Shares of Bank of America (BAC) closed higher by 1% on the day on volume that was better than twice the daily average and that is saying something because that means more than 286 million in the downtrodden Dow component changed hands today. BofA CEO Brian Moynihan said the bank plans to reduce its workforce by 30,000 jobs to trim expenses by $5 billion 2014. That amounts to about 10% of BofA's current workforce, but the 30,000 number is also well below the 40,000 job cuts many media outlets reported on last week.

A Reuters story on the news said there are 50 senior level workers parsing through 150,000 ideas on how to save costs. Here is one from me and it comes free of charge. I will even admit BofA is on to it in a way, but it probably took them too long. Branch closures. Just as an anecdote, I go to four different BofA branches in Southern California depending on where I am at the time and all those branches are big enough to the point where I would not mind living in them and they all have multiple fancy TVs in there. The TVs remain on all day and night, even when the branch is closed.

I know it is not an asset sale or some other more sophisticated way of raising cash, but why not start by cutting the power bill when you need as much cash as BofA is believed to need? For his part, Moynihan said today that the bank has not been required by regulators to look for outside capital, but he also did not rule out a bankruptcy filing for Countrywide.

Bank of America Chart

Looking at the charts, the S&P 500 did not test support around 1120 today, but the index did spend a good part of the day languishing below support at 1155. The late-day bounce took the S&P back above that level, but there is still a lot of work to be to done to retest resistance around 1225.

How much upside is left from here is not all that encouraging if you are a believe in targets from various banks. Wells Fargo cut its year-end price forecast on the S&P 500 10% to 1250 today while Barclays lowered its year-end target to 1325 from 1450. Bank of America said a retest of the 1020-1100 area is possible and from the S&P 500 could fall to 910-985.

S&P 500 Chart

The Dow's chart is even worse off than the S&P 500's, but if there is a glimmer of up it is that the blue-chip index flirted with critical support at 10,800 today and buyers stepped in there. A violation of 10,800 would probably send the Dow back to 10,000. For now, the Dow faces resistance just ahead at 11,100 and then again just over 11,300.

Dow Chart

Give the Nasdaq some credit for looking good by comparison today. The index made its way to within spitting distance of resistance at 2500 and is now a fair bit removed from support at 2400 and 2335. Above 2500, next resistance for the Nasdaq is 2550 and then 2600.

Nasdaq Chart

On a closing basis, at least the Russell 2000 continues to honor support at 675. If that area does not hold, it is back to 650 and probably lower. The 700 area is more psychological support and I think it takes a move back above 725-728 to get fund managers and new buyers involved with the small-cap Index again.

Russell 2000 Chart

Color me skeptical, but even if China does come to Italy's rescue, that is not enough ammunition to fuel anything more than a day or two of gains. Look at it this way: Just because China may buy Italian debt, does not mean it will want buy the Greek, Portuguese, Spanish and, gasp, French equivalents. I remain convinced the EU should allow Greece to default sooner than later. The sooner the bloodletting starts, the sooner it will end.

Even without Europe dominating the headlines, this week is fraught with risk as there are several key economic reports due out here in the U.S. Those will either exacerbate or ameliorate (albeit temporarily) the challenges being endured thanks to Europe.