The Thanksgiving shortened trading week proved to be another rough one for stocks. Disappointing economic data and a parade of negative headlines continued to feed the sell-off. The S&P 500 index gave up -4.6% while the small cap Russell 2000 index dropped -7.4% in just the last four trading days. Transports (-6.3%), financials (-5.7%), and semiconductors (-7.3%) all helped lead the market lower. Let's take a quick look at last week's milestones.

The stock market started the week off on a sour note with the Dow Industrials down -300 points on Monday. Moody's credit rating agency caused the market to shiver with comments regarding France's credit rating. France is one of the largest and strongest of the EU countries but it's triple A credit rating could be in jeopardy. Monday's market was also plagued by headlines regarding the super committee's failure to come to an agreement on reducing the deficit by $1.2 trillion over the next ten years.

Stocks failed to see much relief on Tuesday when the Q3 GDP estimate came in worse than expected at +2.0% versus expectations for +2.5% growth. Selling got ugly again on Wednesday as investors headed out for the Thanksgiving holiday. Roiling the markets was news that Germany, the EU's biggest and strongest economy, essentially saw its bond auction fail. Germany tried to sell six billion euros in debt but only managed to sell 3.6 billion. Germany is considered the one of the safest EU country to buy debt from. If there is no market for German debt it spells major trouble for the rest of the region.

Meanwhile German PMI data came in at 47.9 compared to 49.1 in October. The string of disappointing economic data continued with China's Flash PMI falling to 48.0 in November, down from 51.0 in October. News that U.S. initial weekly jobless claims came in at 393,000 was mostly ignored. Elsewhere at home in the U.S. the Durable goods orders for October dropped -0.7% versus estimates for -0.9%. Minus the more volatile transportation orders the Durable goods number came in at +0.7%, which was better than expected. All of this was on top of news that the Federal Reserve was imposing another, more stringent round of stress tests for the major U.S. banks scheduled for early 2012.

Headlines out of Europe continue to plague stocks. This past week saw the Fitch rating agency cut Portugal's credit rating to junk status at BB+. S&P downgraded Belgium's rating to AA. Investors continue to focus on European bond yields. Spanish and Italian bond yields are still way too high. Eventually the yields will get too high for these countries to continue servicing their debt and they will either need to default or ask for some sort of bailout. We already know that Italy is considered too big to be bailed out. The country currently owes 1.9 trillion euros in debt and needs to roll over 440 billion euros worth of new bonds to pay for expiring debt soon. Greece made headlines again with worries that the recent agreement for a 50% voluntary haircut on its sovereign debt may not be enough and it might have to be closer to 75%.

Think about it for a moment. These European banks all bought and sold credit default swaps on debt they've purchased from other banks and fellow EU countries. Why are they so scared to actually call in these swaps? Why are they willing to take a 50% haircut on billions debt they own from Greece? The reason they are worried is that if they call in their credit default swaps the bank they bought them from might not be able to pay it or the bank they bought them from would have to call in their own swaps to cover the swaps they sold, and so on. Eventually someone is going to throw up their hands and say, "sorry, we don't have enough money to cover these derivatives". Once one bank fails it could trigger a domino effect because the failed bank had counterparty risk to another bank, which was the counterparty to another bank, etc. If a major bank fails it would jeopardize the entire system. This is the major reason why European banks have been so reluctant to lend to each other. The fight right now is between those countries that want the European Central Bank (ECB) to be the lender of last resort but Germany doesn't want that to happen because as the biggest and strongest of the bunch Germany will end up shouldering the burden for the rest of the region.

Switching gears for a moment, we can't talk about Thanksgiving week without mentioning Black Friday. It's the official start to the holiday shopping season. Many retailers started their Black Friday sails earlier in the week. Of course there were plenty of headlines regarding controversy from stores that were opening on Thanksgiving evening instead of waiting until Friday morning. The good news here is that the American consumer is very alive and well. Store traffic across the country was higher than expected. Some analysts were pegging Black Friday sales at three times better than prior expectations. These are early estimates but the tone is positive and it could be a bullish catalyst for retail stocks on Monday. We will also be hearing about the flood of online traffic for Cyber Monday.

Major Indices:

Last week I talked about the "slim chance" that the S&P 500 holds support at the 1200 level. The index blew through that level within the first five minutes of trading on Monday morning. The S&P managed to hold above support near 1180 on Monday and Tuesday and then plunged below it on Wednesday's big drop. Friday's close at 1158 is near the 50% retracement of the S&P 500's rally from the October lows to the October highs. Can the index bounce here? Of course it can. The problem we have is the market's new bearish trend lower. Any bounce is just an oversold bounce that has to make it past multiple layers of resistance. Even though December is normally a bullish season for stocks I am concerned that the path of least resistance is probably lower here.

If the sell-off continues we can look for potential support at 1120 and then 1100. Overhead we have possible resistance about every 20 points at 1180, 1200, etc.

Daily chart of the S&P 500 index:

The tech-heavy NASDAQ composite tried to hold support at the 2500 level on Monday and Tuesday but broke down on Wednesday's market-wide plunge. This index is down -5% in just the last four days and down -10.8% from its October high. On a short-term basis the NASDAQ is very oversold and due for a bounce. Unfortunately now the 2500 level is new resistance, as is the top of the gap down near 2570 and then broken support at 2600.

Daily chart of the NASDAQ Composite index:

The small caps were hammered lower last week. The Russell 2000 index plunged -7.4%, breaking below several layers of potential support. Friday's close left the $RUT at its 61.8% Fibonacci retracement. The 680 and 700 levels are now potential overhead resistance.

Daily chart of the Russell 2000 index

We have a very busy week for economic data. There will be plenty of reports on the housing market. The major announcements will look at the wider economy and the labor market. Wednesday will see the ADP Employment report, the Chicago PMI, and the Fed's Beige Book released. Thursday will see the national ISM index. Friday will deliver the jobs report for November.

- Monday, November 28 -
New Home Sales for October

- Tuesday, November 29 -
Case-Shiller index on home prices
Consumer Confidence for November

- Wednesday, November 30 -
Challenger Corporate Layoff report
ADP Employment report for November
Chicago PMI
Pending Home sales for September
Federal Reserve Beige Book for November

- Thursday, December 1 -
Weekly Initial Jobless Claims
ISM Index
Auto & Truck sales

- Friday, December 2 -
non-farm payrolls (jobs) report for November
Unemployment rate

The Week Ahead:

Looking ahead the market is going to have a divided focus. We have several potentially market moving economic reports in the U.S. this week. Yet there are also several significant meetings coming up in Europe. This coming Tuesday finance ministers from the 17-nation eurozone will be meeting one day ahead of the 27-nation European Union gathering of finance ministers. Headlines and bickering among the various EU members about how to handle their toxic debt problem could push the markets lower. Two weeks from now there is yet another summit for EU leaders in Brussels but whether or not anything productive comes out of the meeting is the question.

Last week I warned readers that this Thanksgiving week could be a rough one. The technical damage to the market is pretty nasty. I am concerned that even if we do see an oversold bounce traders will sell into strength and reload their shorts. Essentially the path of least resistance appears to be down. There is the chance that we might get some positive economic data from the U.S., which could improve investor sentiment. Yet until the U.S. manages to decouple from the problems in Europe it might be hard to sustain any significant rallies. Markets are global and everyone is interconnected. That's the problem. As EU struggles with its debt problems all the austerity measures being enacted around Europe are going to lead to lower GDP growth. Several countries could see recessions or worse. Lower activity in Europe means lower activity in China because the EU is China's largest trading partner. The U.S. will also feel the impact of a slowdown in Europe and China. Fortunately, the Federal Reserve already knows this and there is growing speculation that the Fed might launch or at least hint at some sort of QE3 at their next meeting on December 13th.

Things to watch for this week are Italian and Spanish bond yields. You'll also want to keep an eye on the euro currency. Rising bond yields and/or a falling euro have meant weak stock markets in the last few weeks. I'd also watch for headlines from the Fed's Beige book, the ISM index, and of course the non-farm payroll report out on Friday.

Overall I would be very cautious when it comes to launching new positions. If you do choose to put money to work in the market I would keep your position size small to limit your risk.

- James