It seems like the Christmas holiday gets earlier every year. One of my local radio stations is already playing Christmas music 24 hours a day and it's not even Thanksgiving yet. That seems a bit early. I'd like to enjoy my holidays one at a time, thank you! Investors were definitely not in the holiday spirit this past week. Stocks sank with a sharp reversal lower following Tuesday's bounce. The market seemed to suffer from a general malaise regarding the situation in Europe. It looks like we were right to question the Thursday-Friday rally the week before. By Friday's closing bell the S&P 500 had lost -3.8% for the week. The NASDAQ composite fell -3.9% and the small cap Russell 2000 dropped -3.3%. Gold lost its safe haven status with a plunge to new two-week lows. Meanwhile crude oil surged past the $100 a barrel mark for the first time in months.

Most of the economic data in the U.S. this past week was generally benign with a couple of exceptions. The Retail Sales data for October rose +0.5%, which was better than expected. The New York Empire State manufacturing survey for November rebounded back into positive territory at 0.6 after October's reading of -8.5. The Philadelphia Federal Reserve survey on business activity fell from 8.7 in October to 3.6 in November. Inflation data was mild. The Producer Price Index for October dropped 0.3%, which was lower than the 0.2% decline economists has been expecting. The core PPI was unchanged. Consumer Price Index, a read on inflation at the consumer level, fell 0.1% in October while the core-CPI, which excludes food and energy, rose +0.1%. The report was generally in-line with expectations. Homebuilders did not seem to gain any benefit from news that the latest housing starts and building permits came in higher than expected. Another positive was jobless claims. The weekly initial jobless claims dropped to a new six-month low at 388,000.

Unfortunately none of this data helped fuel gains for the stock market. Investors wearily eyed the situation in Europe. The Fitch rating agency made headlines with their report that the major U.S. banks are at risk if the EU debt contagion spreads. Wow! There's a shocker. Thanks, Fitch. This helped push the financials lower. On top of that the Moody's rating agency downgraded several banks in Germany. Speaking of Germany the ZEW poll, an indicator of economic sentiment, saw its six-month outlook fall to its lowest level in three years.

Europe is still the main driver for market direction these days. After a lot of fireworks two weeks ago market participants are still watching European bond yields. Italian bond yields continue to flirt with the 7% level. Not helping is an uptick in Spanish bond yields, which have risen past 6%. A new wrinkle in this European puzzle is France, which has seen a sharp spike in its bond yields thanks to growing worries that the country might lose its AAA credit rating. French banks have HUGE exposure to toxic debt from the likes of Italy and Greece.

Major Indices:

Last week I suggested investors watch the S&P 500 for a break in its neutral triangle pattern or pennant formation. Unfortunately the index has broken down from this consolidation pattern. The S&P 500 fell to 1210 on Thursday, which happens to be the 38.2% Fibonacci retracement of its rally off the October low. A further breakdown probably means a drop toward the 1185-1180 zone but there is a slim chance that round-number support at 1200 or the 50-dma could hold the market. There are some market pundits suggesting that a breakdown under 1200 will forecast a drop back toward the 1100 area. I am not that bearish yet but a close under 1200 would be very ominous. If stocks manage to bounce the S&P 500 is looking at resistance in the 1240-1250 zone.

Daily chart of the S&P 500 index:

We don't want to look at the NASDAQ composite chart because it's ugly. The 2600 level was supposed to be key support. The NASDAQ broke this level on Thursday and confirmed the drop with another decline on Friday (plus a close under its 50-dma). I suspect we could see the NASDAQ composite fall toward the 2525-2500 zone but whether 2500 can hold up as support is a good question.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index has also broken down from its triangle consolidation pattern but the sell-off hasn't been that bad. The $RUT is still hugging the 720 level. I am optimistic that if the sell-off continues the $RUT might find support near 700 and its 50-dma but that's probably wishful thinking. I'd keep an eye on the 680 level if the market decline continues.

Daily chart of the Russell 2000 index

There are a number of economic reports coming out this week and they're all squeezed into the first three days. The U.S. markets are closed on Thursday for the Thanksgiving holiday. The stock market will be open for a half day on Friday.

The big events this week on the calendar are the Q3 GDP estimate and the FOMC minutes. No one is expecting any significant changes for the GDP estimate so a surprise there could move the market. The market is always interested in a closer look at what the Federal Reserve is thinking.

- Monday, November 21 -
existing home sales for October

- Tuesday, November 22 -
Q3 GDP estimate
FOMC Minutes

- Wednesday, November 23 -
Weekly Initial Jobless Claims (normally released on Thursday)
Personal Income and Spending
Durable goods orders
Michigan Consumer Sentiment

- Thursday, November 24 -
markets are closed for Thanksgiving Holiday

- Friday, November 25 -
markets open a half day

The Week Ahead:

This holiday shortened week could be interesting. There was a lot of interest focused on Spain's election this weekend. The conservative party won with voters betting the conservatives are better prepared to kick start Spain's struggling economy and crushing unemployment. This might give Europe a boost on Monday morning that could filter back toward U.S. markets. However, the real headlines will probably be focused on the "Super committee" in Washington D.C.

As you already know this super committee of democrats and republicans were charged with finding ways to cut at least $1.2 trillion in spending over the near 10 years or face draconian cuts to defense and entitlement programs. Yet no one seems to think this group is going to come together with a deal. Why? Because the automatic cuts that kick in if they don't agree on a deal don't actually hit the budget until 2013. That's after the 2012 elections. You can bet that both sides are going to use the failure of the super committee as propaganda for their re-elections next November. There is always a chance that the politicians will change the rules and vote in new legislation that cancels the automatic spending cuts that were supposed to spur agreement between the two parties. The actual deadline for this super committee is Monday night so congress can vote it by Wednesday, November 23rd. The question is how will the market react since no one actually expects any progress?

Traditionally the Thanksgiving week is bullish for stocks but this year could be an exception. Doing my research this weekend it seems that investor sentiment has definitely taken a turn for the worse, especially when it comes to Europe. Market participants are going to remain focused on European bond yields, especially Italy and Spain. Should France actually lose its AAA rating it could spark a sharp knee-jerk reaction lower for stocks but no one expects that to happen, at least not this week.

Looking ahead I still have a bullish bias for the rest of the fourth quarter but the next week or two might be rough. I would hesitate to buy the dip until we actually see a bounce off support.

I hope you and your family have a wonderful Thanksgiving holiday. It doesn't matter if you live in the U.S. or not, we have much to be thankful for! Now pass me the gravy.

- James